Inflation
Inflation- general rise in the price level new-old/old x 100
It reduces the purchasing power of money. Ex: (1982 gas cost .82 cents and 2018 3$)
When inflation occurs, each dollar of income will buy fewer goods than before.
3 causes of inflation:
1.) The government prints too much money
2.) Demand- pull inflation (we have too many dollars chasing too few goods)
Ex: favorite musician comes to town. Some would pay $ just to get to this concert.
3.) Cost- push inflation. Higher production cost increases prices.
Ex: Hurricane Katrina. Some of the oil refinery were destroyed. Prices would rise for basic necessities.
Unanticipated inflation- (unexpected)
Hurt by inflation:
- Lenders- people who loan money at fixed rates
- People on a fixed income- elderly, retirement, social security
- Savers- saving account
Helped by inflation:
- Borrowers- when we have to borrow money
- Flexible income- money can come from various sources.
- Business where the price of the product increases faster than the price of resources.
Nominal interest rate- unadjusted cost of borrowing money
Real interest rate-the cost of borrowing or lending money that is adjusted for inflation. Nominal
interest rate-inflation= real interest rate
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