INFLATION

Inflation

- a general rise in the price level

- ex: an increase in gas prices in the same day

Deflation

-a general decline in the price level

-ex: a decrease in gas prices in the same day

Disinflation

-is when the inflation rate itself declines

-ex: gas prices staying the same throughout the week

Real interest rate

-the cost of borrowing money that is adjusted for inflation

-the formula is:

real interest rate = nominal interest rate - expected inflation rate

Nominal interest rate

-the unadjusted cost of borrowing money

-the formula is:

nominal interest rate = real interest rate + expected inflation rate

Demand-pull inflation

-is caused by an increase of the demand output that pulls the price upward

-it's triggered by an increase in the total demand, which causes output and employment to rise, which also causes the price level to rise

Cost-push inflation

-an increase in the cost of factors of production

-it happens because there is an increase in resource prices, which causes output and employment to decrease, while the price levels increase

-ex: price of oil, labor, and steel

Unanticipated inflation

-is inflation that wasn't expected

-there are two groups:

people who are hurt by inflation are lenders, people on fixed incomes, and savers
people who are helped by inflation are borrowers because their debt will be repaid with cheaper money than was loaned out

Cost of living adjustments (COLAs)

-when your wages have risen with inflation

Shoe-leather costs

-the increased transaction cost of shopping around

Menu costs

-the money it cost to change prices

For more information, please refer to these videos on Khan Academy:

Gretel's AP Macroeconomics Blog