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BA 103 Lec 7 - UGBA 103 Intro to Finance Lecture 7...

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UGBA 103: Intro to Finance Lecture 7 (2/20/08) POWERPOINT #5: INTEREST RATES Application to Car Loans Reason for difference: pay 908.33 every month Repayment of principle as you get along also has an effect Interest Rates and Inflation Nominal rate = real rate + (expected) inflation Be careful between terms “realized” and “expected” Think realized as positive points of inflations, where middle is expected point of inflation High real rate indicates a prosperous economy Some Problems with Model Consume r Price Index won’t be your inflation rate necessarily Also wholesale price index, inflation rate just for Bay Area Additional factor Image 2 situations with a lot of risk, lots of uncertainty about that Equation nominal rate = real rate + (expected) inflation is not exactly right because real rate can be negative, can have deflation Mattress investment strategy —nominal cannot be less than 0, because people wouldn’t put money with bank Correct equation: nominal rate = max [R r + R I , 0] What’s wrong with I nflation? Stagflation is worst inflation Stagflation = enter a recession (lots of unemployment t), but still a lot of inflation Normal recession have lots of employment, prices aren’t as bad What’s wrong with inflation?
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