Inflation

Inflation

• It Reduces purchasing power of money
• When Inflation occurs each dollar of income will buy fewer goods than before

Three Causes of inflation 

1. Governement Prints too much money 

• Governments that keep printing money to pay debts end up with a situation called Hyperinflation  

      2. Demand Pull inflation

• Too many goods  chasing too many few goods; Demand pulls up prices. 

      3. Cost Push Inflation

• Higher production costs increases prices

Unanticipated Inlfation

• Not Expected    

Who's hurt by Inflation?

• Lenders/Creditors
• Savers
• People on a fixed income
• COLA adjustment people    

Who's helped by Inflation?

• Borrowers 
• Debtors
• Flexible Income people              

Nominal Interest Rate 

• Unadjusted cost of borrowing or lending out money

Real Interest Rate 

• A cost of borrowing or lending money that is adjusted for inflation 
• Nominal Interest Rate - Inflation