Inflation -

Inflation -

• reduces the purchasing power of money 
• when inflation occurs, each dollar of income will buy fewer goods than ever before

• Three Causes of Inflation
1. the government prints too much money 
2. demand - pull inflation (too many dollars chasing too few goods),  demand pulls up prices
3. cost - push inflation (high production costs that increases prices) 

• unanticipated inflation -  unexpected, not prepared

• Hurt by Inflation -
1. Lenders - fixed rate 
2. People on fixed income (Social Security, retirement, etc.)
3. Savers 

• Helped by Inflation -
1. Borrowers / Debtors
2. a business where the price of a product increases faster than the price of resources
3. flexible income individuals

• Unaffected By Inflation - 
1. ARM - Adjustable rate mortgage 
2. Salary, Pension, Social Security that receives a COLA (cost of living adjustment)

• Nominal Interest Rate - unadjusted cost of borrowing or lending money

• Real Interest Rate - the cost of borrowing or lending money which is adjusted for inflation
• Nominal Interest Rate - Inflation = Real Interest Rate