Inflation – general rise in the price level. It reduces "purchasing power" of money
Purchasing power – amount of goods and services that money buys
I deal inflation rate is 2 to 3%
Three causes of inflation: printing too much money, demand pull inflation (too many dollars chasing too few goods. Demand increases but supply stays the same. Result is a shortage driving prices up. An overheated economy with excessive spending but same amount of goods), cost push inflation(higher production cost increases prices)
Inflation formula – 100 X current year price index - previous year price index/previous year price index
Deflation – decline in the general price level
Disinflation – this occurs when the inflation rate itself declines
Rule of 70 – used to calculate the number of years it will take for the price level to double at any given rate of inflation. Formula: 70/annual rate of inflation
Real interest rate – amount of money that is borrowed. The percentage increase in purchasing power that a borrower pays to the lender(adjusted for inflation) formula: nominal interest rate - expected inflation
. Nominal interest rate – the percentage increase in money that the borrower pays back to the lender. Not adjusting for inflation.
Hurt by inflation – lenders (people who lend money), people who are on a fixed income, savers
- Helped by inflation- borrowers (people who borrow money),business where the price of the product increases faster than the price resources
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