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Inflation

Inflation. Who wins & loses from inflation. Falling Purchasing Power. $ 1 00 in 1958 => need $ 8 25 in 2015. Inflation calculator on my website . INFLATION. Economic condition of Average Prices Rising Lowers the purchasing power of a dollar

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Inflation

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  1. Inflation Who wins & loses from inflation

  2. Falling Purchasing Power $100in 1958 => need $825 in 2015 Inflation calculator on my website 

  3. INFLATION • Economic condition of Average Prices Rising • Lowers the purchasing power of a dollar • Economic numbers must be adjusted for inflation • Real numbers – adjusted for inflation • Nominal numbers–NOT adjusted for inflation • A country sells 10 pairs of blue jeans in both 1999 & 2014. • Blue Jeans cost $20 in 1999 and $40 in2014 (assume same exact jeans) • What is the change in nominal & real GDP for 2014? • Nominal GDP doubles from $200 => $400 • Real GDP is unchanged = 10 pairs of jeans sold

  4. Consumers notice inflation when their paychecks start to buy less! COLA = cost of living adjustment Social security benefits has an annual COLA

  5. 2-Types of Inflation • Demand-Pull Inflation: • Too many dollars chasing too few goods (caused by printing money) • Spending increases faster than production • Demand Side Inflation • Cost-Push Inflation • Large increase in cost of factors of production (input prices) • examples: price of oil, labor, steel, etc…. • Supply Side Inflation (Occurred in late 1970’s in USA)

  6. Inflation:Expectedvs. Unexpected • Unexpected or sudden inflation is what really creates winners & losers in our economy • In theory, when actual inflation is predictable, workers, employers, savers, lenders & borrowers have time to adjust & plan. • Therefore, expected inflation is less harmful What you Expect? Actual Inflation

  7. Who is Helped by inflation? • People in large amount of Debt • Fixed interest rates on Mortgages, Car Loans, Student Loans • Loan stays the same in Nominal Dollars • Loan falls in Real Dollars

  8. Who is Hurt by Unexpected Inflation? • People on a fixed income • $500 a month pension +>Nominal dollars unchanged=> real income falls • Minimum wage workers • Wage increases usually increases lag inflation • Savers • Interest earned does not cover inflation rate…

  9. Why Inflation is Bad? • Difficult for Business to plan • price goods/services • Lowers value of our currency • Lowers purchasing power (real value of money) • Raises long terminterest rates

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