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Inflation & Deflation Effects · Acedra
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Inflation & Deflation Effects
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inflation or deflation can wreak havoc on your personal finances if you don't understand its effects but not to worry our trusty time machine will let us walk through the effects during three historical periods so that we are better prepared for whatever the future might hold ready to begin [Music] it's the beginning of 1893. we're in the Gilded Age imagine you're a farmer wanting to borrow a hundred dollars from the bank to buy one of these newfangled machines called a tractor for the past
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two years inflation has been at exactly zero percent is it a good time to borrow money from the bank
0:42
no deflation hits that means that the real value of money is rising over time when you borrowed 100 in the beginning of 1893 it had a real value of one hundred dollars by the end of 1893 with inflation at negative 1.1 percent the real value of your 100 loan has grown to 101 dollars deflation continues and by the end of 1895 the real value of the 100 you borrowed in 1893 is a hundred and eight dollars so in addition to whatever interest you're paying the dollars
1:19
you're paying back to the bank at the end of 1895 are much more valuable than the ones the bank lent you in 1893.
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next let's jump to 1946. your spirits are high World War II is over the price controls and rations enacted during the war are going away as a retiree you're receiving a monthly 25 social security check from the government should you Lobby your Congress person to automatically adjust your Social Security payment for inflation
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yes you should Lobby for automatic inflation indexing inflation shoots up after the war going as high as 14 in 1947. the real value of your nominal 25 check Falls year after year finally reaching a real value of 18.70 by the end of 1948 so while your social security check still says 25 on it you can buy a lot less with it than you could in 1946. to prevent inflation from eating away at the value of benefits automatic inflation adjustments were added to Social Security in 1975.
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lastly let's look at Venezuela in 2012. Nicholas Maduro of the United Socialist Party of Venezuela is running for president inflation has been high up 21 from 2011. in 2013 Maduro wins the election imagine you're a resident with 1 000 Bolivars the Venezuelan currency in savings should you keep your Bolivars or should you pay high fees to transfer your savings into another currency foreign
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pay the high fees and transfer hyperinflation hits and the currency devalues by 40 throughout the year if you didn't transfer your savings your 1 000 boulevards would be worth 712 boulevards just one year later unfortunately inflation continues to devalue the Bolivar for several years by the end of 2018 your 1000 boulevards from 2013 only has a real value of 0.11 Bolivars Bolivars became so worthless that many Venezuelans opted to transform their paper bills into art giving it a new
3:44
type of value as you can see unexpected inflation and deflation throughout history can have huge impacts on the real values of loans income and savings by understanding the effects we can better protect ourselves from the consequences if you're a teacher you should check out our inflation unit plan that incorporates this video if you're a learner make sure this video sticks by taking a few quick practice questions or if you're ready for more macroeconomics click for the next video foreign
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