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ECON 1020 (99)
Lecture 54

ECON 1020 Lecture 54: Lecture 54

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ECON 1020
Ryan A.Compton

o982 If you lend someone 100 and then interest rate is 10 the next year, when you get paid back you want to be paid 110 It redistributes real income away from them and toward others Who is Unaffected or Helped by Inflation?: Some people are unaffected by inflation and others may actually be helped by it For the second group, inflation redistributes real income toward them and away form others o Flexible income receivers Income that adjusts for inflation are not going to be harmed Individuals who derive their income solely from social programs are largely unaffected by inflation, because payments are indexed to the CPI Benefits automatically increase when the CPI increases, preventing erosion of benefits from inflation Debtors Borrowers Someone lends you 100, then when you pay back the true real value goes down and you have to pay back less Anticipated Inflation: Effect are lessened to the extent inflation is correctly anticipated Ex: going to boss and saying I think inflation is going to rise, and therefore changing income salary to adjust for inflation COLA clauses in income contracts Costofliving adjustments (COLA): an automatic increase in the income (wages) of workers when inflation occurs Inflation premium on loans Building the inflation rate into the interest rate for loans o Nominal interest rate = real interest rate + inflation premium o When we charge people, we charge the nominal interest rate
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