Unit Two: Notes and Need-To-Knows 2/2/2015

inflation: General rise in prices
inflation rate: measures the percentage increase in the price level overtime. Key indicator of economy's wealth.
deflation: decline in general price level.
disinflation: occurs when deflation rate itself declines.  
consumer price index (CPI): measures inflation by tracking yearly prices of a fixed basket of consumer goods and services.
There are several ways to find inflation rate:

1. Using Market Basket Data:
    (current year market basket value - base year market basket value) / (base year market basket value) x 100
                                                 

2. Price Index
    (current year price index - base year price index) / (base year price index)  x 100
                                                     

3.  Rule of 70 says that it takes about 70 years for inflation to double. This is an estimate. 

real interest rate is the cost of borrowing or lending adjusted for inflation

nominal interest rate is the unadjusted price of borrowing or lending money.

Causes of Inflation:
1. demand - pull inflation: caused by an excess of demand over output that pull prices upward.
2. cost - push inflation: rise in per unit production cost due to increase in resource cost. 

WHO ARE HURT BY INFLATION:
1. People with fixed incomes
2. People who save
3. People who lends money

WHO ARE HELPED BY INFLATION:
1. Borrowers
2. People with fixed-rate contracts