Unit 2: Topic 3- Inflation

Inflation: reduces the purchasing power of money

• When inflation occurs, each dollar of income, will buy fewer goods than before.
• Inflation Rate: 2-3%

3 Causes of inflation

1. Hyper- inflation:The government prints too much money. 
2. Demand-Pull Inflation: (demand pulls up prices): too many dollars chasing too few goods. demand pulls prices up. 
3. Cost-Push Inflation: higher production costs increases prices 

Unanticipated Inflation- Unexpected change in price

People hurt my inflation

• lenders/ predators (borrow money at fixed rates)
• people on a fixed income; receiving social security or retirement. (ex. senior citizens)
• savers
• creditors

People helped by inflation

• borrowers/ debtor: signed contract, conditions cannot change.
• flexible income
• a business where the price of a product increases faster than the price of resources.

Nominal Interest Rate vs. Real Interest Rate

Nominal Interest Rate: adjusted cost of borrowing or lending out money.

Real Interest Rate: the cost of borrowing or lending money that is adjusted for inflation.

Nominal - inflation =