Objectives•Describe inflation, describe how it happens, and list its effects on purchasing power•Define real and actual dollar and interest rates•Conduct constant dollar and then current dollar analyses
Objectives (cont.)•Define and use composite and commodity-specific price indexes•Develop and use cash flows that inflate at different interest rates and cash flows subject to different interest rates per period
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Meaning and Effect of Inflation•Inflation causes money to lose purchasing power•Inflation makes future dollars less valuable than present dollars•Deflation, the opposite of inflation, makes future dollars more valuable than present dollars but this rarely happens in today’s world•Inflation happens (it’s not important why it happens)