Notes (2/2/15)- Inflation

• I. Inflation: rise in general level of prices
• standard rate is 2%-3%
• II. Measuring Inflation
• a. Inflation rate: measures the % increase in the price level over time; key indicator of the economy's health
• i. deflation: decline in general price level
• ii. disinflation: when the inflation rate itself declines
• b. Consumer Price Index (CPI): measures inflation buy tracking the yearly price of a fixed basket of consumer goods & services; in addition, indicates changes in cost of living and price level
• III. Solving Inflation Problems
• a. Finding inflation rate using market basket data
• current year market basket value - base year market basket value / base year market basket value * 100
• b. Finding inflation rate using price indexes
• current year price index - base year price index / base year price index * 100
• c. Estimating inflation using the Rule of 70
• used to calculate # of years it will take the price level to double at any given rate of inflation
• years needed to double inflation = 70 / annual inflation rate
• d. Determining real wages
• real wages = nominal wages / price level * 100
• e. Finding real interest rates
• real interest rate = nominal interest - inflation premium 
• i. Real interest rate: cost of borrowing and lending adjusted for expected in inflation rate
• Nominal interest rate: unadjusted cost of borrowing or lending money
• IV. Cause of Inflation
• a.Demand-pull inflation: cause by an excess of demand over output that pulls prices upward
• Cost-pull inflation: caused by a rise in per unit production cost due to increasing resource cost
• V. Effects of Inflation
• Anticipated: anticipated inflation
• Unanticipated inflation: not expecting inflation