© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 13.21 LESSON 13.2 Inflation  Describe the types of inflation, and identify two sources of inflation.  Identify.

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© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON LESSON 13.2 Inflation  Describe the types of inflation, and identify two sources of inflation.  Identify the problems that unexpected inflation creates. Objectives

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON LESSON 13.2 Inflation  inflation  demand-pull inflation  cost-push inflation  nominal interest rate  real interest rate Key Terms

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Inflation Basics  Inflation is an increase in the economy’s general price level.

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Types of Inflation  Hyperinflation—extremely high inflation  Disinflation—a reduction in the rate of inflation  Deflation—a decrease in the general price level

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Two Sources of Inflation  Demand-pull inflation is inflation resulting from increases in aggregate demand.  Cost-push inflation is inflation stemming from decreases in aggregate supply.

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Consumer Price Index Since 1913

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Impact of Inflation  Inflation reduced the value of the dollar and takes away confidence in the value of the dollar over the long term.

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Expected Versus Unexpected Inflation  Arbitrary gains and losses  Expected inflation is of less concern than unexpected inflation

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON The Transaction Costs of Unexpected Inflation  Reduced productivity  Increased transaction costs of market exchange

© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON Inflation and Interest Rates  Nominal interest rate—the interest rate expressed in current dollars as a percentage of the amount loaned; the interest rate on the loan agreement.  Real interest rate—the interest rate expressed in dollars of constant purchasing power as a percentage of the amount loaned; the nominal interest rate minus the inflation rate.