equation: Nominal GDP
------------------- x 100 = GDP Deflation
Real GDP
- BASE = Nominal and Real GDP
- in the base year the GDP defoliator equals to 100
- years after base year GDP defoliator is greater than 100
- years before the base year GDP defoliator is less than 100
Consumer Price Index ( CPI ) - most commonly used measurement of inflation
- measures the market basket of goods for a typical urban American family
equation: Price of a market basket of goods in the current year price
------------------------------------------------------------------------ x 100
Price of the market basket of goods in the base year price
Inflation:
equation: Price index in year 2 - price index in year 1
-------------------------------------------------------- x 100
Price index in year 1
REAL INTEREST RATES
- percentage increase in purchasing power that the borrower must pay the lender for a loan.
equation: Nominal interest rate - inflation
(answer is usually under 10)
-unanticipated inflation (not expected)
- adjusted for inflation
VS
NOMINAL INTEREST RATES
- percentage increase in money the borrower must pay the lender for a loan
equation: Nominal interest rate = expected interest rate + inflation premium
- Anticipated inflation
* fisher effect
- not adjusted for inflation
UNANTICIPATED INFLATION
Hurt by inflation
1. Savers
2. Creditors/ lender ( people you owe)
3. People who are on a fixed income (Welfare, Elderly, Retire, Medicare, Medicate)
Hurt by inflation
1. People who owe debt
Cola adjustment (elderly)
-automatic wage increase when inflation occurs
*New York
*California
-cost of living adjustment
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