Inflation: An Overview

Module 14
Mar 2015
Real Wage – the wage rate divided by the
price level
Real Income – is income divided by the price
Inflation – A given amount of money buys
Inflation rate – the percent change per year in
a price index – typically the consumer price
Price level in year 2 – price level in year 1 x 100
Price level in year 1
Shoe-leather costs – the increased costs of
transactions caused by inflation – ex. Germany
1921 shop keepers brought their money to the
bank several times a day to exchange it for
foreign currency (because the reichmark was
unstable) this had a cost of time and labor
Menu costs – the real costs of changing listed
prices – imagine the cost of labor involved
changing all the prices at the new Haggen’s
Unit-of-account costs – arise from the way
inflation makes money a less reliable unit of
measurement – in olden times, people placed a
unit of value on such things as cattle – so a
person’s rent could be 2 cattle per year.
Nominal Interest Rate – the interest rate
actually paid for a loan
Real Interest Rate – the nominal interest rate
minus the rate of inflation
Disinflation – the process of bringing the
inflation rate down – happens with