ECON 1BB3 Lecture Notes - Lecture 10: Gdp Deflator, Interest Rate, Real Interest Rate

• School: McMaster University
• Department: Economics
• Course: ECON 1BB3
• Professor: N A

Document Summary

Cola = cost of living allowance allow for the real dollar value that people are getting to remain constant over time (using cpi) Problems with cpi x = (118. 7x50000)/61. 8 = . Gdp deflator reflects prices of all goods and services produced domestically: cpi prices change- quantities stay fixed. Gdp deflator quantities change, prices stay fixed improvements; overstates inflation. Both are constructed using a ratio: cpi = cost of curr bskt/ cost of base bskt. Example: you have decided not to buy a pair of shoes that cost and instead put the into a savings account earning %5 interest per year. Nominal interest rate: interest rate without correction for inflation - measures the increase in the number of dollars in your bank account. Real interest rate: interest rate with correction for inflation measures the increase in the purchasing power of the dollars in your savings account.