ECO102H1 Lecture Notes - Lecture 21: Real Wages, Fallacy, Interest Rate
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ECO102H1 Full Course Notes
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Anticipated inflation (expected): the inflation rate expected by individuals and firms. Unanticipated inflation: the difference between actual inflation and the anticipated rate of inflation. The truth : unanticipated inflation redistributes income and creates winners and losers . Inflation robs people of the purchasing power of their incomes. Reality: if prices level doubles (inflation of 100%) then income in total must double as well. Mary pays john to mow lawn expenditure (mary) = = income (john) [100% inflation] mary pays john to mow lawn. If price level doubles, not everyone"s income will double, so (unanticipated) inflation creates winners and lowers. (income on average goes up by xx%) Workers, firms: concern is with real level of wages. Inflation = 5% real wage increase = 5% - 5% = nil (not 2%); workers lose, firms gain; Inflation = 1% real wage increase = 5% - 1% = 4% (not 2%); workers gain, firms lose;