Unit 2 Notes - Inflation
1. What exactly is inflation??
- Inflation is defined as a general rise in the price level
- Reduces the purchasing power of money
2. What happens when inflation occurs?
- Each dollar of income will buy fewer goods than before
3. 3 Causes of Inflation
1. Hyperinflation - The government prints too much money to pay debt
2. Demand-Pull Inflation - Too many dollars chasing too few goods;demand pulls up prices
3. Cost Push Inflation - Higher production cost increases prices
4. Unanticipated Inflation - Not expected
5. Calculating Inflation
To calculate the annual inflation rate, use this formula - Nominal GDP/Real GDP x 100
How does CPI affect inflation? It is one of the major indicators of inflation in economy that relates to market basket goods of a particular year and the base year. The formula for that would be important to also include.
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