In this lesson summary review and remind yourself of the key terms and calculations used in describing the costs of inflation.
Log in Eileen Preston 5 years agoPosted 5 years ago. Direct link to Eileen Preston's post “What about producers of p...” What about producers of products. You produce apples. You sell them. Inflation went up so what does that mean for the producer - will he make more money because apples cost more than the year before? • (5 votes) melanie 5 years agoPosted 5 years ago. Direct link to melanie's post “If by "make more" you mea...” If by "make more" you mean profit, well, that depends. In the short run, an apple producer might benefit from inflation because some of their costs don't change. For example, suppose you hire workers at $10 per hour on a one-year contract. Midway through the year there is inflation so the price of apples increases. IN that case, yes, you might benefit from inflation. In fact, you would even respond to that inflation by producing more. But, in the long run, those workers will eventually want higher wages because of inflation. Once all of those costs have also adjusted, the producer doesn't benefit at all any more. This is actually covered in a later lesson on something called "Short-run aggregate supply". (14 votes) Victor Parmar 4 years agoPosted 4 years ago. Direct link to Victor Parmar's post “I still did not quite ful...” I still did not quite fully understand why 0 inflation, i.e., no change, is a bad thing. Shouldn't this be the ideal goal? • (4 votes) Enn 4 years agoPosted 4 years ago. Direct link to Enn's post “At exactly zero inflation...” At exactly zero inflation, there is a risk that inflation may turn negative(deflation). (8 votes) Patrik Leskovsek 4 years agoPosted 4 years ago. Direct link to Patrik Leskovsek's post “Game of Thrones question ...” Game of Thrones question number 2? :D • (6 votes) 😊 5 years agoPosted 5 years ago. Direct link to 😊's post “what is the effect of a r...” what is the effect of a rise in unexpected inflation by 5% on the following people; 1 a union member with a wage contract • (4 votes) JHW624 4 months agoPosted 4 months ago. Direct link to JHW624's post “My view:⭐Union member wi...” My view: ⭐Individual with a large stash of cash in a safe deposit: As prices rise, the purchasing power of cash diminishes. ⭐Bank lending money at a fixed interest rate: The borrower benefits because they are repaying the loan with money that has lower purchasing power due to inflation. ⭐Person not due to receive a pay raise for another 11 months: They might experience a decrease in real wages until their next scheduled pay raise, which is 11 months later. Hope that helps :) (2 votes) Ethan Lin 4 years agoPosted 4 years ago. Direct link to Ethan Lin's post “What's the difference in ...” What's the difference in fixed rates and variable rate and who does it help or hurt? • (3 votes) devcdesai 5 years agoPosted 5 years ago. Direct link to devcdesai's post “It is repeatedly stated t...” It is repeatedly stated that 'deflation has devastating effects'. What exactly are the devastating effects? Can someone explain with example? If prices are lesser, people will simply have to borrow lesser, won't that be a good thing? • (2 votes) Christina 4 years agoPosted 4 years ago. Direct link to Christina's post “Well prices drop because ...” Well prices drop because firms are forced to sell for whatever reason, if they need to liquidate it is likely production will slow as well. possibly even lay off many resulting in high unemployment (2 votes) Malko_28 4 years agoPosted 4 years ago. Direct link to Malko_28's post “"Unexpected inflation arb...” "Unexpected inflation arbitrarily redistributes wealth from one group to another group, such as from borrowers to lenders." • (2 votes) SussannahY 4 years agoPosted 4 years ago. Direct link to SussannahY's post “Hi I need some help under...” Hi I need some help understanding why this answer is correct. QUESTION: "Ygritte loaned Mance $900 He agreed to repay her in full, plus 6%percent interest, after one year. When he pays off his loan, Mance discovers he is better off than he had expected to be. Which of the following best describes what must have happened to the rate of inflation? ANSWER: "Inflation was higher than he expected I thought if inflation is higher than he expected, it means he pays MORE because a higher inflation % multiplied by his loan = a higher value in total to pay? • (2 votes) Eirian 3 years agoPosted 3 years ago. Direct link to Eirian's post “The interest may be fixed...” The interest may be fixed. When the inflation rose, what that 6% was worth less than expected. This doesn't mean the amount was changed--only its REAL worth was. Hope this helps! (1 vote) Anastasiia Yarychkivska 4 years agoPosted 4 years ago. Direct link to Anastasiia Yarychkivska's post “Is the "Interest rate" ac...” Is the "Interest rate" actually the anticipated rate of inflation? • (2 votes) Omar Eldesouky 8 months agoPosted 8 months ago. Direct link to Omar Eldesouky's post “No, although inflation is...” No, although inflation is often one of the factors that central banks consider when setting interest rates (1 vote) Aleksi Getov 6 months agoPosted 6 months ago. Direct link to Aleksi Getov's post “So inflation encourage to...” So inflation encourage to borrow money rather than save. That doesn't sound very logical, but maybe I can't see the whole picture. With deflation you only borrow money with very good reason and only profit if you can provide real value or make smart investments. It also doesn't make any sense to lend money with negative real interest rates, you take a risk and pay for that risk. • (1 vote)Want to join the conversation?
In the case of high inflation, interest rates may be raised, as much as required, but in the case of deflation monetary policy is limited as interest rates can at most be reduced to only 0 in most cases.
Deflation can result in monetary policy becoming ineffective so having a little inflation lowers the risk of entering a deflationary situation.
2.someone with a large stash of cash in safe deposit
3.a bank lending money at a fixed interest rate
4.a person who is not due to receive a pay raise for another 11 months
⭐Union member with a wage contract: It depends. If the contract includes cost-of-living adjustments or clauses that link wages to inflation, the individual may see their wages increase in response to higher inflation. However, if the contract does not account for unexpected inflation, the purchasing power of their wages may decline, as their income fails to keep up with the rising prices.
This confuses me, as from what I understand, inflation is bad for lenders and good for borrowers... Is this a mistake or a mistype, or have I misunderstood? Thanks!
If the rate of inflation is higher than he expected it to be, then Mance is effectively paying Ygritte back less than he thought he would be paying her."
As an expert in economics and inflation, it's evident from the discussion that the participants are exploring various aspects of inflation and its impact on producers, consumers, and economic agents. I'll break down the key concepts discussed in the article and provide insights into each topic.
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Effect of Inflation on Producers:
- In the short run, producers may benefit from inflation as some costs, like labor contracted at a fixed rate, remain constant while product prices increase.
- However, in the long run, as all costs adjust to inflation, the benefits diminish. This is discussed in the context of "Short-run aggregate supply."
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Zero Inflation and Deflation:
- There's a question about why zero inflation might not be an ideal goal. The response highlights the risk of deflation, where monetary policy becomes limited, and having a little inflation helps avoid entering a deflationary situation.
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Effects of Unexpected Inflation on Different Individuals:
- A discussion on the effects of a 5% rise in unexpected inflation on various individuals:
- Union member with a wage contract: Depends on contract terms.
- Individual with a large stash of cash: Purchasing power diminishes.
- Bank lending money at a fixed interest rate: Borrower benefits due to lower real interest rates.
- Person not due for a pay raise: May experience a decrease in real wages until the next scheduled raise.
- A discussion on the effects of a 5% rise in unexpected inflation on various individuals:
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Fixed Rates vs. Variable Rates:
- A question is raised about the difference between fixed and variable interest rates and who benefits or is hurt by each.
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Devastating Effects of Deflation:
- A query about the devastating effects of deflation is raised. The response suggests that deflation can lead to reduced prices, causing firms to slow production and potentially resulting in high unemployment.
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Loan Repayment and Inflation:
- A scenario where a borrower discovers he is better off than expected after repaying a loan. The correct answer is that inflation was higher than expected, explaining that the real value of the repaid amount decreased due to inflation.
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Interest Rate and Anticipated Rate of Inflation:
- A question is posed regarding whether the "interest rate" is the anticipated rate of inflation. The response clarifies that while inflation is a factor in setting interest rates, they are not the same thing.
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Inflation's Influence on Borrowing and Saving:
- A participant expresses confusion about inflation encouraging borrowing rather than saving. Another participant suggests that inflation encourages borrowing, and deflation prompts cautious borrowing for real value or smart investments.
By addressing these concepts, the participants in the discussion are engaging with fundamental economic principles related to inflation, its effects on various economic agents, and the broader implications for economic stability.
