ECON 1110 Lecture Notes - Lecture 3: Nominal Interest Rate, Real Interest Rate

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Suppose an island produces 2 goods: coconuts and fish. Cpi in 2003 = 600/600 x 100 = 100. Cpi in 2010 = 1180/600 x 100 = 196. 67. Fact: in zimbabwe, the inflation rate from mid-november 2008 was. 79 600 000 000 % or prices double almost every 24 hours. Anticipated inflation: households can adjust easily. Purchasing power of money: the amount of goods and services that can be purchased with a unit of money, interest rates. Nominal interest rate: the price paid per dollar per period of time. Real interest rate = nominal interest rate inflation. Example: assume that rachel agrees to lend to michael for one year. Michael agrees to pay rachel at the end of the year. Nominal interest rate = 12-10/10 x 100 = 20% Real interest rate = 20% - 5% = 15: exchange rates. The number of canadian dollars required to purchase one unit of foreign currency.

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