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UNIT 2 - Inflation (Rate)

Inflation

-Reduces the purchasing power of money

(Ex: Gas price increase from 1982 to 2018 from $.63 to ~$3)

*When inflation occurs, each $ of income will buy fewer goods than before

Natural Rate: 2-3%
Causes:
  • Gov't prints too much money

Gov't that keeps printing money to pay debt end up w/ hyperinflation condition

  • Demand-pull Inflation

Too many $$ chasing too few goods

Demand pulls of prices

  • Cost-push Inflation

Higher production costs increases prices

(Ex: Hurricanes)

Unexpected  (unanticipated) Inflation

Hurt by Inflation
Helped by Inflation
* Lenders/ Creditors
(locked into fixed rate
* Fixed Income   
(Social Security, Unemployment)
*Savers   
     
    • Debtors/Burrowers
    • Flexible income
    • A business where price of product increases faster than the price of resources

Nominal Interest Rate- unadjusted cost of burrowing or lending money

Real IR + Inflation

Real IR - cost of burrowing or lending money adjusted for inflation

                                 Nominal IR - Inflation

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