Inflation - Unit 2

UNIT II (Inflation)

What is inflation? What are the types of inflation?

Inflation - this is the rise in general price level.

Deflation - the decline in general price level.

Disinflation - this occurs when inflation rate declines or is declining.

Hyperinflation - occurs when a country experiences very high, accelerating, and perceptibly "unstoppable" rates of inflation.

How do you solve inflation problems?

Rule of 70 - calculates how many years will it take for the inflation rate to double.

Formula: (70 / inflation rate). The inflation rate is a percentage.

Inflation rate = (current year price index - previous year's price index) / (previous year's price index).

Interest rate - real wages, what comes in. 

Real interest rate - cost of borrowing or lending money that is adjusted for inflation.

Nominal interest rate - unadjusted cost of borrowing or lending money.

Formula for interest rate: (Nominal interest rate - Inflation).

What are the causes of inflation? How many are there? 
There are two types of inflation:

1. Demand-pull: Caused by excess of demand over output that pulls prices upward.
         1. Increases in government purchases
         2. Excessive increases in money supply, which creates a situation of hyperinflation.

2. Cost-push (supply-side economics): Caused by a rise in per unit production costs due to increasing resource costs.
         1. Supply shocks - dramatic rise in energy or raw material prices.
         2. Price-wage spiral - workers seek higher wages to offset rising consumer prices.

If you're still confused about inflation, you can watch this video, which outlines every important aspect of it in a broad perspective.