inflation rate: measure the percentage increase in the price level overtime.
key indicator of economy's wealth.
deflation: decline in general price level.
disinflation: occurs when deflation rate itself declines.
consumer price index (CPI): measures inflation by tracking yearly prices of a fixed basket of consumer goods and services. in addition, CPI changes in cost of living and price level.
solving inflation rate problems:
1.finding inflation rate using market basket data:
current year market basket value - base year market basket value x 100
base year market basket value
2. finding inflation rate using price index:
current year price index - base year price index x 100
base year price index
3. estimating inflation using rule of 70:
rule of 70 is used to calculate the number of years it will take for the price level to double at any given rate of inflation.
years needed to double inflation = 70
annual rate of inflation
determining real wages:
real wages = nominal wages x 100
price level
finding real interest rate:
real interest rate = nominal interest rate - inflation premium
1. real interest rate - cost of borrowing or lending adjusted for inflation. expressed as a percentage.
2. nominal interest rate - unadjusted price of borrowing or lending money.
causes of inflation:
1. demand - pull inflation: caused by an excess of demand over output that pull prices upward.
2. cost - push inflation: rise in per unit production cost due to increase in resource cost.
effects of inflation:
anticipated: cost of living adjustment, wages
unanticipated: EX. lay offs.
hurt:
- fixed income EX. retirement, social security
- savers
- lenders/creditors
- borrowers [debt repaid with cheaper dollars than originally loaned]
- fixed contract EX. rent contract.
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