Unit 2: Inflation

Continuation of 2/3/17...

• GDP deflator- Price index used to adjust from nominal GDP to real GDP.

-(Nominal GDP/Real GDP) x 100
- In the base year GDP deflator will always equal to 100
-Years after the base year the GDP will be greater than 100
-Years before the base year the GDP deflator is less than 100

• Consumer price Index (CPI)

- Measures inflation by tracking changes in the price of  a market basket goods ( cars, trucks, etc).
-(Price of market basket in current year/ Price of market basket in base year) x 100

2/6/17

Inflation 

• Inflation- Increase or rise in price, it reduces the "purchasing power" ( the amount of goods and services your money can buy) of money

• 3 causes of inflation

1. Printing too much money
2. Demand- pull inflation by an excess of demand over output that pulls public prices upward 
3. Cost push inflation- cause by a rise in per-unit production cost due to an increase in resource cost.

• Ideal inflation rate= 2 to 3%

- Inflation: (current year price index- base year price index)/base year price index x(100)

Rule of 70-used to calculate the number of years it will take for the price level to double at any given rate.

• Deflation- General decline in the price level.
• Disinflation- Occurs when the inflation rate itself declines
• Nominal interest rate- unadjusted cost of borrowing or lending money.
• Real interest rate- cost of borrowing or lending money adjusted for inflation 

- real interest rate = Nominal interest rate-expected inflation 

Unanticipated Inflation 

• Hurt by inflation ....

- lender – people who lend the money at fixed interest rates
- people with fixed incomes
-savers

• Helped by inflation....

- borrowers - people who borrow money
- A business where the price of product increases faster than the price of resources

• COLA (cost  of a living adjustment)-  some works have salaries that mirror inflation they negotiate wages that ride with inflation 
• Here is a video elaborating on inflation 

https://m.youtube.com/watch?v=UMAELCrJxt0