Lecture_5_spring_2009

Lecture_5_spring_2009 - Lecture 5 Principles of...

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Lecture 5 Principles of Macroeconomics Econ 2 Spring, 2009
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Yugoslavian 500 billion bank note (1993?)
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Tracking the Economy A recession is defined as: A) GDP declines for 1 quarter B) Unemployment above 8% C) Whatever the NBER says it is D) GDP has less then 1% growth for 2 quarters
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Tracking the Economy A recession is defined as: C) Whatever the NBER says it is
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Tracking the Economy Productivity recessions I recessions II
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Tracking the Economy Recession and Financial Stress Government (FED and Treasury) Bailouts Troubled Asset Relief Program
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Tracking the Economy
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Tracking the Economy
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Real and Nominal Interest Rates How do you know what nominal interest rate to charge or borrow at? Loaning money today means Forgoing buying a good today Buying a good in the future when you are paid back
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Real and Nominal Interest Rates In order to delay consumption today you need to get a return The return should be in real terms So, if you loan out a dollar today need to get more than a dollar when repaid– even if there is no inflation
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Real and Nominal Interest Rates Suppose expect inflation to be 5% If you loan a dollar at 5% interest Get back $1.05 But $1.05 does not allow you to buy more goods Prices have gone up by 5% So, the interest rate you charge has to be greater than 5% to be able to buy more goods
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Real and Nominal Interest Rates Let’s suppose you want to be able to buy 3% more real goods in the future if you loan out $1 today We will see how the real interest rate is determined later You want the real return to be 3%
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Real and Nominal Interest Rates So, r = .03 What you want back next year is: 1 + r, that is, buy r more goods The goal here is to find the nominal interest rate, i , to charge to get that real return, knowing inflation is π
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Rates If charge a nominal interest rate of
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Lecture_5_spring_2009 - Lecture 5 Principles of...

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