Lecture 12 Inflation
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What is purchasing power?
The quantity and quality of goods/services one can buy with money
What is inflation?
A rise in prices of most goods and services over time
What are two causes of Inflation?
- 1. Demand-Pull Inflation
- 2. Cost-Push Inflation
What is Demand-Pull Inflation?
- Occurs when demand increases faster than supply
- Usually occurs in large scale economic changes (war, social and technological change)
What is Cost-Push Inflation?
- Deliberate increase from producers
- May be due to increase in production costs
- Often seen in oil industry and technology field
1. Countries with developed economies and stable governments =
2. Countries with developing economies and unstable governments =
- 1. low inflation
- 2. high inflation
What in Venezuela's inflation rate?
What are three problems with inflation?
- 1. Limits economic growth in the expansion phase of the business cycle
- 2. Erosion of real income - seen in geographical diverse areas (NY vs. Pekin)
- 3. Effect on Interest Rates
Who is hurt by inflation?
- 1. People living on fixed incomes - retirees
- 2. Savers - due to fixed rate of savings
- 3. Lenders - money loaned loses value over time
How is inflation measured?
Consumer Price Index
What is Consumer Price Index?
government index of the average price of consumer goods and services and its change over time (aka market basket)
What does the CPI include?
food/beverages costs, housing, utilities, transportation, medical care, entertainment
How is CPI calculated?
Where does the base year in the CPI equation remain? What does the Bureau of Labor want to change it to?
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