Inflation
Is a general rising level of prices. It reduces the " purchasing power " of money.
PP - it is the amount of goods and services that your money can buy.
Ex.: It takes $2 to buy today what cost $1 in 1982
It takes $6 to buy today what cost $1 in 1961
3 causes of Inflation
1. Printing for much money
2. Demand - Pull Inflation
It is caused by an excess in demand over output, that pulls prices upward.
3. Cost Push Inflation
It is caused by in rise in per unit cause of production cost due to increasing resource unit cost. [Higher production increase the cost]
Formula Inflation Rate
Current year price index - The base Year price index x 100
The base year price index
Rule of 70: it is used to calculate the number of years it will take, for the price level to double at any given rate of inflation.
Formula
Formula
70 / annual rate of inflation
Deflation and Disinflation
Deflation- general decline in the price level.
Disinflation- it occurs when the inflation rate itself declines.
Nominal Interest Rate: it is the unadjusted cost of borrowing on lending money
Real Interest Rate: is the cost of borrowing money, adjusted for inflation.
Real Formula=
Nominal interest rate - excepted inflation
Cost-of Living-Adjustment (Cola)
• Some works have salaries that mirror inflation.
•They negotiated wages that rise with inflation.
Consumer Price Index (CPI)
It measures Inflation by tracking the changes in the price, of a market basket of goods.
Formula
Price of market basket of goods in the current year x 100
Price of market basket of goods in the base year
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