Unit II: Inflation
Inflation is a general rise in the price level. An example of this would be an increase in gas prices in the same day.
Deflation is a general decline in the price level. An example of this would be a decrease in gas prices in the same day.
Disinflation is when the inflation rate itself declines. An example of this would be gas prices staying the same throughout the week.
Disinflation is when the inflation rate itself declines. An example of this would be gas prices staying the same throughout the week.
Real interest rate is the cost of borrowing money that is adjusted for inflation. The formula is as follows:
real interest rate = nominal interest rate - expected inflation rate
Nominal interest rate is the unadjusted cost of borrowing money. The formula is a follows:
nominal interest rate = real interest rate + expected inflation rate
Demand-pull inflation is caused by an excess of demand over output that pulls prices upward. It is triggered by an increase in aggregate (total) demand, which causes output and employment to rise, which causes the price level to rise.
Cost-push inflation is an increase in the cost of factors of production. It occurs because there is an increase in resource prices, which causes output and employment to decline, while the price level is rising. Examples would include the price of oil, labor, and steel.
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Unanticipated inflation is inflaton that wasn't expected. There are two groups:
- Those who are hurt by inflation are lenders, people on fixed incomes, and savers.
- Those who are helped by inflation are borrowers because their debt will be repaid with cheaper money than was loaned out.
Cost of living adjustments, or COLAs, is when your wages have risen with inflation.
Shoe-leather costs are the increased transaction cost of shopping around.
Menu costs are the money it cost to change prices.
For more information, please refer to these videos on Khan Academy:
Introduction to inflation: https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/economic-iondicators-and-the-business-cycle/price-indices-and-inflation/v/introduction-to-inflation?modal=1
Deflation: https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/economic-iondicators-and-the-business-cycle/price-indices-and-inflation/v/deflation?modal=1
Winners and losers from inflation and deflation: https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/economic-iondicators-and-the-business-cycle/costs-of-inflation/v/winners-and-losers-from-inflation-and-deflation-ap-macroeconomics-khan-academy?modal=1
Real and nominal return: https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/ap-financial-sector/nominal-v-real-interest-rates-ap/v/real-and-nominal-return?modal=1
Nominal interest, real interest, and inflation calculations: https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/ap-financial-sector/nominal-v-real-interest-rates-ap/v/nominal-interest-real-interest-and-inflation-calculations-ap-macroeconomics-khan-academy2?modal=1
Deflation: https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/economic-iondicators-and-the-business-cycle/price-indices-and-inflation/v/deflation?modal=1
Winners and losers from inflation and deflation: https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/economic-iondicators-and-the-business-cycle/costs-of-inflation/v/winners-and-losers-from-inflation-and-deflation-ap-macroeconomics-khan-academy?modal=1
Real and nominal return: https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/ap-financial-sector/nominal-v-real-interest-rates-ap/v/real-and-nominal-return?modal=1
Nominal interest, real interest, and inflation calculations: https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/ap-financial-sector/nominal-v-real-interest-rates-ap/v/nominal-interest-real-interest-and-inflation-calculations-ap-macroeconomics-khan-academy2?modal=1
I would also like to add that in the event that inflation does go up, lenders are hurt in because of the inflation. When they are paid back what they loaned out, the money they received would be lower purchasing power dollars making them not the same as when they were first loaned out.
ReplyDeleteThat's very true. In the same way, people on fixed incomes and savers are also hurt because inflation makes it so that things get more expensive, which means their money is used up faster.
DeleteI appreciate the extra links for the interests and inflation to help us farther understand the topic.
ReplyDeleteNo problem Bernard. Khan Academy is a great tool to understand these topics.
DeleteDo you think a hyperinflation crisis (one like in Zimbabwe) could ever occur in the United States?
ReplyDeleteI don't think so. The U.S. is more organized in those types of things as a first-world country and we've been through events like the Great Depression that have helped make the country learn from its mistakes. Of course there will be high inflation sometimes, but not anything crazy like what is happening in Zimbabwe.
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