Inflation: a rise in the general level of prices
formula: new GDP deflator-old GDP deflator/old GDP deflator x 100
Inflation rate: measures the percentage increase in the price level over time; offers a key indicator of the economy's help
Deflation: decline in the general price level
Disinflation: occurs when the inflation rate declines
Consumer price index (CPI): measures inflation by tracking the yearly price of a fixed basket of consumer goods and services
indicates changes in the price level and cost of living
Find inflation rate using market basket data:
formula: current year market basket value - base year market basket value/base year market basket value x 100
Find inflation rate using price indexes:
formula: current year price index-base year price index/base year price index x 100
Estimating inflation using the rule of 70: formula: years needed to double inflation = 70/annual inflation rate
Rule of 70 is used to calculate the # of years it will take for the price level to double at any given rate of inflation
Determining real wages: formula: real wages=nominal wages/price level x 100
Finding real interest rate: formula: nominal interest rate-inflation premium
Standard inflation: 2-3%
Real interest rate: cost of borrowing or lending money that is adjusted for inflation
Nominal interest rate: unadjusted cost of borrowing or pending money

Causes of inflation:
A. Demand pull inflation: it is caused by an excess of demand over output that pull prices upward
B. Cost push inflation: caused by a rise in per unit production cost due to increasing resource cost
Effects of inflation:

• Anticipated inflation
• Unanticipated inflation

What is hurt by inflation?

• Fixed income (social security, scholarship, etc.)
• Savers
• Lenders/creditors

What is helped by inflation?

• Borrowers (debt will be repaid)