CAS EC 102 Lecture Notes - Lecture 3: Nominal Interest Rate, Real Interest Rate
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CAS EC 102 Full Course Notes
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If forecasting, use ^e, expected inflation: i=r + i=r+ ^e. Bank wants r=5%, and ^e=3%, sets i at 8% Changes in the price level and interest rates. As p goes up, goes up. As goes up, ^e goes up. Since i = r + ^e, as ^e goes up, i goes up. Calculating what a past amount would be worth in a later year. Value of ,000 now = ,000 x (cpi[july 2010]/cpi[1969]) = ,188,070. Ex: in 1980, bu raised tuition, room & board to /year. Value of in 2016 = x (cpi[2016]/cpi[1980]) = ,713. The inflation fallacy: most people think inflation erodes real income. But inflation causes the cpi and nominal wages to rise together over the long run. Distributional effects: some workers" incomes will not keep up with inflation. Shoeleather costs : the resources wasted when inflation encourages people to reduce their money holdings. Includes the time and transaction costs of more frequent bank withdrawals.
