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Inflation

Inflation. Who wins & loses from inflation. Falling Purchasing Power. $ 1 00 in 1958 => need $ 8 97 in 2019. Inflation calculator on my website . INFLATION. Economic condition of Average Prices Rising for same good/service 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 $897 in 2019 Inflation calculator on my website 

  3. INFLATION • Economic condition of Average Prices Risingfor same good/service • Lowers the purchasing power of a dollar • Economic numbers must be adjusted for inflation • Nominal numbers–Not adjusted for inflation • Real numbers – Adjusted for inflation • Example: Prices rise 5% & you get a 3% raise: • Nominal pay increase = • Real Pay increase =

  4. Real Minimum Wage

  5. Nominalvs. Real • A country sells 10 pairs of blue jeans in both 1999 & 2014. • Blue Jeans cost $20 in 1999 & $40 in2014 (assume same exact jeans) • What is the change in Nominal & Real GDP for 2014? • NominalGDP = Current price X Qty sold • Nominal GDP doubles from $200 in 1999 to $400 in 2014 • ($20 X 10 units & $40 X 10 units) • Real GDP = Base Year Price X Qty Sold • Real GDP unchanged at $400=> same in both years! • $40 X 10 units & $40 X 10 units (using 2014 as base year)

  6. Consumers notice inflation when their paychecks start to buy less! COLA = cost of living adjustment Social security benefits & some pensionshave a yearly COLA

  7. 2-Types of Inflation • Demand-Pull Inflation: • Too many dollars chasing too few goods(caused by printing money) • Spending increases faster than production (Venezuela today) • 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)

  8. Inflation:Unexpectedvs. Expected • Unexpectedor sudden inflation is what really creates winners& losersin our economy • In theory, if 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?

  9. 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 fall behind (lag) inflation • Savers • Interest earned does not cover inflation rate… • $ in savings account falls in value

  10. 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 Example: Nominal payment fixed @ $2,027 Real payment falls 30 Year Mortgage $400,000 4.5% fixed interest rate Monthly payment = $2,027

  11. Inflation Worksheet

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