ECON 100 Lecture Notes - Lecture 6: Aggregate Demand, Deflation, Price Level
Document Summary
Hurt by inflation: persons living on fixed income (retirees) But now social security payments are indexed for inflation. Payments are automatically adjusted each year to account for the prior year cpi inflation rate. You expect 2% inflation, and charge a 5% interest rate. Now it takes to buy the same basket. Generally lenders charge an interest rate higher than expected inflation. They want a reward for giving up the use of money for a year. Real interest rate = nominal interest - expected inflation. Low inflation happened to lenders during the 1970"s/early 1980"s. Inflation makes it hard to plan for the future. So, price stability is a goal for our macro-policymakers. Classical economists: believed economy as a whole functions just like an individual market. Economy return on its own to long run equilibrium. Any excess supply quickly eliminated through price cuts. Prolonged period of very high unemployment and very low real gdp.
