ECO 212 Lecture Notes - Lecture 3: Money Illusion, Real Interest Rate, Real Wages
15 Nov 2016
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Inflation the continuing rise in the general price level of goods and services. Measured as a growth rate in the average level of prices. Problems: forces people to buy less gdp goes down. Based on inflation rate gov. will adjust monetary policy (control inflation: uncertainty about future. May make consumers worried change buying patters. Difficult to foresee/ agree upon long-term wages. Uncertainty about loaning money difficult to know if interest rates are reasonable based on projected inflation. Higher inflation = higher interest rates: costs of changing prices (menu prices) I. e. inflation happens grocery story has to. If unexpected inflation occurs reprint food label prices: you do well less interest, but banks do worse undercharge with real interest rate (instead of nominal) It costs more money/ resources to carry more money. Makes purchasing less streamlined: money illusion. People misinterpreting how much their wage can buy them when inflation happens. Bankrupting themselves because money is worth less post inflation.
