Inflation: general overview

a. Definition
a. Therefore, as inflation increases every dollar you own subsequently buys a
smaller percentage of a good or a service.
b. So when prices rise, and the value of money falls the result of the two is
inflation.
c. An analysis of inflation reveals several challenges of how people and firms
behave within an economy. an increase in price level reduces the purchasing
power for both the individuals and businesses resulting in economic instability,
people start becoming afraid to spend money, and inflation causes creditors to
lose money creating a negative impact on trades.
b. Causes
a. Demand-pull: This theory can be summarized as "too much
money chasing too few goods". In other words, if demand is
growing faster than supply, prices will increase. This
usually occurs in rapidly growing economies. This theory is
often promoted by the Keynesian school of economics.
b. Cost push- when this happens companies need to increase
prices in order to maintain their profit margins. Increased
costs that can have an affect on a company include things
such as a rise in minimum wage, taxes, or an increased
cost on resources or other imports.
c. Monetary: similar to the other two hypothesis, this is based
off of supply and demand . therefore when there is too much
money, it makes the value of that money decrease, which
cause the price of everything else that is priced based on a
dollar amount to rise.
c. Measures
a. The most common and well-known practice of measuring inflation is the change
in the consumer price index. Otherwise known as the CPI
b. Cpi is calculated by taking price changes for each item in the predetermined
basket of goods and averaging them.
d. Effects on consumers:
a. Inflation affects different people in different ways, with
some benefiting from its effects at the expense of some
who lose out.
b. So as you can see the major effect of inflation is that it
causes a nations national nominal currency to lose its
value. Which makes it more difficult for people to afford the
basic necessities, if their labor is not able to keep pace
with inflation
 c. The effect of inflation on savers and ionvestors is that they
lose theyre purchasing power as well.
e. Effects on business:
a. So, normally when most people think of inflation, their first
though is how it affects themselves as a consumer. But the
effects of inflation also play a major role in businesses.
b. As stated before as the value for a countries nominal
currency decreases due to inflation, the price of goods and
services rises
c. Following the effect inflation had on individuals, consumer
purchasing abilities causes them to begin to steer clear of
some of the purchases they used to make more often.
d. With rising prices not only affecting the prices the
consumer pays, they also have an adverse effect on how
much it costs to do business.
Inflation effect on rates:
a. General overview of what banks do
a. So, to keep it fairly simple, we know that banks accept deposits from customers,
raise capital from investors and lenders, and then use that money received to
make loans, buy securities and provide other financial services to customers.
b. General overview on interest rates / loans
i. Interest rates are the proportion of a loan that is charged as the interest
to the borrow, which is general expresses as an annual percentage of the
loan outstanding
ii. A loan is something that is borrowed, especially a sum of money that is
expected to be paid back with interest.
b. Overview on the federal reserve and its roll in inflation
a. The federal reserve also referred to as the FED, is the central bank of the U.S.
government
b. The fed is known for regulating the U.S. monetary and financial system.
c. The primary function of the Federal Reserve is that it serves as the central
banking authority of the United States, managing the banking system of the
country. The five main functions of the FED are to serve as the governments
bank, to serve as a bank for other banks, to supervise and regulate bank
operations, to protect consumers credit rights, and to ensure that the financial
system remains stables through judicious use of monetary policy.

c. How inflation effects interest rates

a. Inflation and interest rates are often mentioned in the same breath, and this is
because they are so closely related.
i. As stated prior the fed who is known for regulating the U.S. monetary
and financial system set the baseline for interest rates.
ii. Meeting eight times a year to set short term interest rate targets,
 b. Interest rates directly affect lending and borrowing because higher interest rates
make servicing loans costlier.
i. Just in general when interest rates are lowered, more people are able to
borrow more money – which gives consumers, and businesses more
money to spend. This also causes the economy to grow and inflation to
increase. Monetary inflation – Is the result of an oversupply of money in
the economy
ii. For rising interest rates, as interest rates are increasing the opposite
effect takes place. As interest rates are increased, consumers tend to
save as returns from savings are higher, with less disposable income to
spend as a result of the increase in saving the economy slows and
inflation decreases/
iii. Therefore the job of the federal reserve in order to maintain costly loans
for banks is to maintain a healthy balance between rates. However,
Conclusion
iv.
a. Effects on economy
b. Effects on the banking industry
c. Effects on businesses
d. Effects consumers