1. Inflation
Definition
Inflation is when value of money decreases so mostly the price of the
outputs increase.
each dollar of income will buy fewer goods and services compare to the
time before the inflation.
reduces the "purchasing power" of money
Some prices may be relatively constant while others are falling
o Ex: During the inflation of the 1970s and 80s in the United States,
the prices for various electronics actually declined
Problems inflation poses are subtler than those posed by unemployment
o Theseproblemsmayinclude:
Measurement
The main measure of inflation in the U.S. is the Consumer Price Index
(CPI)
The government uses this index to report inflation rates each month and
each year
Government also uses the CPI to adjust Social Security benefits and
income tax brackets for inflation
The CPI reports the price of a "market basket " of some 300 consumer
goods and services that presumably are puchased by a typical urban
consumer, taking into account the inflation the consumers are
experiencing
CPI = (price of the most recent market basket in the particular year) /
(price estimate of the same market basket in 1982-1984) x 100
the CPI is arbitrarily set to 100 for 1982-1984
Rate of inflation is found by comparing that year's index w/ the index in
the previous year i.e. (that year's index - previous year's index) /
(previous year's index) x 100 = rate of inflation

2. Types
Demand-pullinflation
o "too much spending chasing too few goods"
o Usually, the price level increases due to too much spending, so
much to the point that the economy cannot produce fast enough.
o When resources are fully employed, it is impossible to expand
output for this excess amount of demand.
o Thus, the large amount of demand drives up the price level, causing
demand-pull inflation.
o This will continue as long as there is excess total spending
Cost-pushinflation
o Inflation that arises on the supply, or cost, side of the economy
o This type of inflation explains rising prices in terms of factors that
raise per-unit production costs at each level of spending
o Per-unit production cost = total input cost / unit of output
o As rising per-unit production costs squeeze profits and reduce the
amount of output firms are willing to supply at the existing price
level, prices rise.
o The major source of cost-push inflation are supply-shocks (ex:
sudden rise in oil prices)
o Is self limiting; it will die out by itself
Redistributioneffects of inflation
Nominal and Real Income
o Nominal Income: number of dollars received
o Real Income: the amount of goods and services nominal income
can buy, or its purchasing power. Itisthe nominal
incomeadjustedforinflation:
 Real Income = (nominal income)/(price index, in hundredths)
 If nominal income rises at the same percentage rate as the
price index, purchasing power actually stays the same.
However, in most cases, not everybody's nominal income rises
at the same rate.
o Percentage change in TI = Percentage change in NI - Percentage
change in price level
Anticipations

3. o Anticipated inflation: inflation that is fully expected. This is less
harmful because income receivers may be able to avoid or lessen
the effects of inflation