Transcript Economics 12_Ch.10_lesson 7

Ms. Park
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Amy
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What’s the difference between CPI and GDP
deflator?
What do you use when you want to calculate
Real income? Real GDP?
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Inflation redistributes purchasing power
among different groups in ways that can be
both economically harmful and unjust;
purchasing power keeps pace with inflation
for some individuals, but not for others.
What are:
a) Full indexation
b) Partial indexation
c) Fixed incomes
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Full indexation: nominal income rises at the
inflation rate
Partial indexation: nominal income rises at
less than the inflation rate
Fixed incomes: nominal income stays
constant
Household incomes:
 Inflation means not only increasing prices but
expanding nominal incomes as well.
 The effect on households’ purchasing power
depends on which is greater- inflation or the
increase in nominal income.
 Loosing purchasing power, maintaining
purchasing power, gaining purchasing power.
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Inflation can also redistribute purchasing
power between borrowers and lenders
◦ actual inflation > anticipated inflation
 Borrowers win
◦ actual inflation < anticipated inflation
 Lenders win
◦ actual inflation = anticipated inflation
 No one affected
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Nominal interest rate: the interest rate expressed in
money terms
Real interest rate: nominal interest rate – inflation rate
Inflation premium: % built into a nominal interest rate to
anticipate the rate of inflation for the loan period
*Inflation premium = anticipated inflation
Desired real interest rate
= Nominal interest rate - inflation premium
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The nominal interest rate is 8%, the inflation
premium on loans is 3%, and actual rate of
inflation 5%.
What is the real interest rate? Find the
difference between this rate and the desired
real interest rate and explain how any
difference affects borrowers and lenders.