1. What do economists Look at when evaluating price changes over time?
Inflation
What do economists Look at when evaluating price changes over time?

2. Inflation Examining Price Fluctuations Aggregate Supply
Price Level
Aggregate Supply
Total amount of goods and services produced throughout the economy
Aggregated Demand
Total amount of spending by individuals and businesses throughout the economy

3. Inflation Inflation Deflation
Average price level increases for all products in the economy
AG Demand increases faster than AG Supply
Price increases cause value of a dollar to decrease
Deflation
Decrease in price level of all products in an economy
AG Demand decreases faster that AG Supply
Price decreases causes value of a dollar to increase

4. Inflation Purchasing Power
The amount of real goods and services that a dollar can buy is called purchasing power. Purchasing power does not vary directly with inflation
Nominal value of dollar is the actual value. The real value is what it can buy. If I give you a dollar today and you save it until next year its real value will be less than its nominal value

5. Inflation Anticipated Inflation Unanticipated Inflation
inflation rate that we believe will occur
Unanticipated Inflation
inflation rate that comes at a surprise
Unanticipated Inflation hurts those that lend money (fixed rate loan is getting paid back with inflated money that buys less.
Lenders lend money to make money. They must take inflation into account. If unanticipated inflation occurs they are hurt because the interest rate they charged was not large enough.

6. Who is Hurt by Inflation?
Fixed- Income People
Savers
Creditors
Who is unaffected or Helped by Inflation?
Flexible-Income Receivers
Debtors

7. Rate of Interest
Nominal rate of interest
rate expressed in today's dollars
Nominal Interest Rate = Real Interest + Inflation Premium (expected rate of inflation)
Real rate of interest
nominal rate of interest minus the anticipated rate of inflation
Inflation causes interest rates to rise
COLA
Cost of living adjustment: an automatic increase in income when inflation rate increases

8. Inflation
Causes of Inflation
Demand-Pull Inflation
AG Demand increases faster than the economy’s productivity causing the price level to increase but real GDP stays the same
Pulls prices even higher
Increase in Money supply and credit
Cost-Push Inflation
Producers raise prices to cover the higher resource costs causing a rise in price and Real GDP falls
Price Expectation
Supply Shock- increase the cost of production for all or many firms

9. Demand-pull inflation
Cost-Push Inflation
Demand-pull inflation

10. Inflation

12. Inflation Measuring Inflation Consumer Price Index (CPI)
Measure of the average change over time in the price of a fixed group of products
1st Select a base year to measure price change
Market Basket- bureau selects a sample of commonly purchased consumer items
Producer Price Index
Average change over time in the price of goods and services bought by producers
Based on some 3200 products
Inflation Rate
Monthly or annual percentage change in price
IR= [(CPI year B- CPI year A) / CPI Year A] X 100

13. Inflation Hyperinflation- worst degree of inflation
EXAMPLE- Germany after WWI

14. Effects of Inflation Inflation Decrease purchasing Power of a Dollar
Decrease Value of Real Wages
Increased Interest Rates
Decreased Saving and Investing
Increased Production Costs