chapter7 - Inflation CHAPTER7 WhatIsInflation?

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  CHAPTER 7 Inflation
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What Is Inflation? Inflation  is an increase in the average level of prices,  not a change in any specific price. The average price is determined by finding the  average price of all output. A rise in the average price is called  inflation . A fall in the average price is called  deflation
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Relative Prices vs. the Price Level Relative price  is the price of one good in comparison  with the price of other goods. A general inflation may prevent relative price  changes from reallocating resources in the economy.
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Redistributive Effects of Inflation Not everyone is worse off during an inflation. People buy and sell different goods. Well being depends on what goods are bought (sold)  and at what prices. LO2
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Price Effects Price changes are the most familiar effect of inflation. The effect on economic welfare is shown in the  difference between nominal and real income. Nominal income  is the amount of money income received  in a given time period, measured in current dollars. Real income  is income in constant dollars: nominal  income adjusted for inflation. LO2
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Price Effects LO2
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Price Effects Two basic lessons about inflation: Not all prices rise at the same rate during inflation. Not everyone suffers equally from inflation. LO2
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Income Effects Even if all prices rose at the  same  rate, inflation  would still redistribute income. Redistributive effects originate both in expenditure  and income patterns. Effects on fixed-income groups: retired people,  workers with fixed-income contracts, lenders with  fixed interest rates. LO2
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Income Effects What looks like a price to a buyer looks like an  income to a seller. When nominal incomes rise faster than prices, real  incomes increase. When prices rise, incomes mostly rise too. LO2
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Winners and losers from inflation depend on the  form of wealth they own. Examples: savings accounts, real estate, gold, bonds. You lose when inflation reduces the real value of 
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chapter7 - Inflation CHAPTER7 WhatIsInflation?

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