Get Started. It's Free
or sign up with your email address
Rocket clouds

1. Income Effects

1.1. Fixed incomes

1.1.1. Some people have fixed incomes the do not go up with inflation. Ex: Retired people who depend primarily on private pensions. Ex: Workers with multiyear contracts that fix wages at preinflation levels. Ex: Lenders (like banks) that have lent funds at fixed interest rates also suffer from real income losses when price levels rise.

1.2. Not all market participants suffer from a real income decline when prices rise.

1.2.1. Some people's nominal income rises faster than average prices, thereby boosting their real incomes.

1.3. If prices are rising, income must be rising too.

1.3.1. On average, incomes rise just as fast as prices.

1.3.2. Those whose wages did not continue to increase end up losing real income.

2. Wealth Effects

2.1. The wealth effect can be stated as the increase in the money that a person spends, when they believe that their wealth has increased.

2.1.1. The perception of the increase in wealth may arise when the value of their assets go up.

2.1.2. When the value of the assets increase, a person feels 'rich', and due to this, tend to spend rather than save. The actual wealth of a person has not increased, but the value of money has decreased. Assests may include property, stock, gold, ect..

3. Price Effects

3.1. Price changes are the most visible consequences of inflation.

3.2. Ex: Cost of tuition increases, in order to stay in college you must go without various amounts of goods and services. You end up being worse off since you cannot afford as many goods and services as you could before tuition went up.

3.2.1. The effect of tuition increases on your economic welfare is reflected in the distinction between nominal income and real income. Nominal income is the amount of money you receive in a particular time period; it is measured in current dollars. Real income is the purchasing power of that money; income in constant dollars. (Nominal income adjusted for inflation.)

3.3. Not all prices rise as the same rate during inflation.

3.3.1. Some prices rise rapidly, others rise modestly, and some actually fall.

3.4. Not everyone suffers equally from inflation.

3.4.1. Those people who consume the goods and services that are rising faster in price bear a greater burden of inflation; their real incomes fall further.