Inflation

Submitted By:Arush Singh

Meaning of Inflation
Is the rise in general piece level. Not necessary that all prices are increasing. In periods of inflation, some prices are rising while some are declining. The most important: general price level, and the increase to have an affect.

How to measure Inflation?

Using CPI when price index measures the general level of prices in the economy. CPI year A=(basket yearA)/(basket in base year) X100 Therefore, inflation rate2000 =CPI2000-CPI1999 X100 CPI1999

Types of Inflation
1. Demand Pull Inflation: assume that the economy is at its full capacity of production. Assume that total spending is greater than production level what will happen to price level?

Since all resources are fully employed, production cannot respond to this increase in demand. Therefore, outputs cannot be expanded to meet demand This excess demand will bid up prices, causing demand-pull inflation. Too much spending for too few goods

2. Cost-Push Inflation: This is an increase in per-unit production costs. Per-unit production cost = Total input cost / units of outputs This will reduce profits and reduce outputs firms willing to produce.

Thus, the economys supply of goods and services declines and the price level rises. Costs are pushing the price level upward Sources: supply shocks: increase in costs or raw materials, energy inputs, wages

Redistribution Effects of Inflation

Inflation hurts some, leaves others unaffected.

That is, inflation redistributes real income from some to others

terminology
Nominal and real income: Real income = nominal income/price index Real wage: purchasing power of nominal wage (number of $$ received as wages, rent, interest, or profits) Some people will be affected more than others as inflation occurs (redistribution effect)

The following rule tells us approximately by how much real income will change: % Real in Income = % in nominal income - % in price level Anticipation and the effect of inflation?

Who is Affected by Inflation?

Unanticipated inflation hurts: 1. Fixed income receivers 2. Savers 3. Creditors Who is Unaffected by Inflation? 1. Flexible income receivers 2. Debtors

Anticipated Inflation
The redistribution effects of inflation are less sever or can be eliminated when people can expect inflation and can adjust their nominal incomes to reflect the expected price-level increases. Save more now (consume less)

Hyperinflation
It is an extremely high rate of inflation. Agents expect inflation rate to even gets higher, leading them to spend now. May cause economic collapse. Uncertainty about future prices.