MATH 2FM3 Lecture Notes - Lecture 6: Growth Factor
22 Oct 2015
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1. 7 in ation and the real rate of interest: in ation is the rise in the general level of prices of goods and services. It is a central indicator for a country"s economy: the real rate of interest takes in ation into account. A rst guess for the real rate of interest would be i r, (i the interest rate per annum, r the annual rate of in ation). This is not quite right as the next example shows: example: you invest 1000 for one year at an e ective rate i = 15. 5%. Currently the price of an item a is 1. One year later the price of the item becomes 1. 1, so r = 10%. 0 the growth in item a is the year). However i r = 5. 5% (cid:54)= 5%. The net growth (the di erence) (1 + i) (1 + r) = i r is measured in 1 + r (1+ in ation).
