Unit 2- Inflation

Inflation: General rise in the price level

Deflation: General decline in the  price level

Disinflation: Occurs when the inflation rate itself declines

Real interest rate: Cost of borrowing money that is adjusted for inflation
       Real Interest Rate = Nominal Interest Rate - Expected Rate of Inflation

Nominal Interest Rate: Unadjusted cost of borrowing money.
       Nominal Interest Rate = Real Interest Rate + Expected Rate of Inflation

Demand pull inflation
    -"Too many dollars facing too few goods." 
    -Caused by excess of demand over output that pulls prices upward
    -Triggered by an increase in aggregate demand which causes output and employment to rise,           which causes the price level to rise


Cost push inflation
    -Increase in the cost of factors of production. 
    -Increase in resource prices
    -Output and employment will decline, while the price level is rising.
        Example: Price of oil

Unanticipated Inflation: Inflation that was not expected

Those hurt by inflation:
-Lenders: People who loan out money
-People on fixed income
-Savers

Those helped by inflation:
-Borrowers: Debt will be repaid with cheaper dollars than those loaned out

Cost of Living Adjustment (COLA): Wages have risen with inflation

Shoe-leather costs: Increased transaction cost of shopping around

Menu Costs: Money it costs to change prices