1. Who is hurt and who is helped by inflation?
Helped or
Hurt

2. Inflation
General Rise in Prices Over Time

3. Causes 1. Demand Pull Factor- Demand increases cause prices to go up
2. Cost Push Factor- Input costs, such as wages, push up prices
3. Quantity Theory- An increase in the money supply leads to increased prices
Wage-Price Spiral occurs when 1 and 2 lend to each other

4. Effects Hurts Savers with Fixed Interest Rates
Hurts people on Fixed Incomes (reduces purchasing power)
Hurts lenders who are being paid back with less valuable dollars
Helps Borrowers on fixed rates of interest who pay back with less valuable dollars
Helps government when borrowing as well

5. Effects
Purchasing Power- Dollar will not buy as much as it could before
Income- Erodes fixed incomes that do not have a Cost of Living Adjustment (COLA) such as a pension
Social Security (SS) includes a COLA
Interest Rates- Savers need to beat the inflation rate with higher interest returns otherwise they lose money

6. In Summary (write this down!)
Individuals who receive fixed incomes are HURT by inflation
Lenders and savers
People who make fixed payments are HELPED
borrowers

7. 1. Banks extend many fixed-rate loans.
HURT
The money the bank receives for the loan repayment will be less in real terms (purchasing power) than the loan amount.

8. 2. A farmer buys machinery with a fixed-rate loan to be repaid over a 10 year period.
HELPED
Farmer makes payments that are less in real terms than the loan amount.

9. 3. A family buys a new home with an adjustable-rate mortgage that is above the rate of inflation. (Think of Jerome)
HURT
The amount you pay each month will increase as inflation increases.

10. 4. A widow lives entirely on income from a fixed-rate pension
4. A widow lives entirely on income from a fixed-rate pension. (Think of Helga)
HURT
The purchasing power of the income will be less as inflation continues to deflate the value of the dollar.

11. 5. A retired couple lives entirely on income from a pension the woman receives from her former employer that includes a cost of living adjustment (COLA) thought her union. (Think of Theresa)
HELPED
The purchasing power of the pension payment will be higher then the inflation rate because of the COLA.

12. 6. The federal government has a five billion dollar debt.
HELPED
The government will repay the debt with money that has less purchasing power.

13. HURT Revenue from contract will be worth less.
7. A firm signs a contract to provide maintenance services at a fixed rate for the next 5 years.
HURT
Revenue from contract will be worth less.

14. 8. Your friend rents an apartment with a 3 year lease.
HELPED
Rent payments will remain the same even if prices go up.