Unit 2: Inflation

Inflation - a general rise in the price level ( $1 can buy less in general than a $1 in the past due to inflation )

Deflation - decline in the general price level

Disinflation - occurs when the inflation rate it self declines.

Real interest rate- the cost of borrowing or lending money that has been adjusted for inflation(%)

Nominal interest rate-  expected rate of inflation

Nominal interest rate-  the un-adjusted cost of borrowing money (real interest rate+ expected rate of inflation)

Inflation rate 
new year - old year / old year x100
 

                                     Demand(pull inflation ) vs Cost(push inflation)
Demand- to many dollars chasing too few goods

  • Trigger by an increased of aggregate demand 
  • Output and employment rise while the price level is rising
  • Spending increase faster then production 
Cost push - cost by arise by per unit production cost due increasing research cost.
  • Trigger by a decrease of aggregate supply 
  • Output and employment decrease while the price is rising (oil , labor ,steal)
Shoe leather costs/menu cost 
SLC- increase cost of transaction cause by inflation 
Menu cost (MC) - real cost of changing the listed cost 

                                   Unanticipated inflation - not excepted 

Hurt by inflation                            Helped by inflation
  • lender                                    Borrowers
  • fixed income 
  • savers 
Cost Of living Adjustment - negotiated wages rise within inflation 









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