10-28 notes

10-28 notes - TODAYS MENU: Wednesday 28 October 2009 I....

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TODAY’S MENU: Wednesday 28 October 2009 I. BUSINESS A. Practice Problems 1. Chapter 23: 1, 2, 6-11, 13, 16, 18, 19 2. Chapter 25: 3-7, 9-11, 13, 15, 16, 18, 19 B. Third exam: One week from Monday (09 November) II. SUBSTANCE A. Uses for the inflation rate 1. Finding the true cost of borrowing: real interest rate 2. Deflating 3. Indexing a. Adjust nominal values to hold real values constant – this is done all of the time. Done with federal income tax tables. b. Application: Social Security benefits – you would adjust the nominal to hold real constant so you would increase it by 4%. (0=+4% - +4%) It is a fixed income (social security is) but it is fixed in real terms. The problem with inflation is the loss of purchasing power. On the macro level this is not a problem at all. In a market transaction a dollar spent is a dollar earned. This is true because when you buy something two things happen, you spend a dollar and the person you pay earns a dollar. So you may have to spend twice as much to buy something but someone else spends twice as much in selling. This will give them more ability to spend. B. True Costs of Inflation: NOT loss of purchasing power, rather. .. 1. Interference with long-run planning – the goal of policy makers to keep inflation rates low and steady, the problem is that if the inflation rates are not low and steady and we cannot predict what the rate of inflation will be then we do not know the true cost of inflation. This will make you have a harder time to figure out what the costs of borrowing is. It makes lending more risky, which will cause less lending to be done. Less borrowing means less spending, less spending means less jobs. Less jobs means
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10-28 notes - TODAYS MENU: Wednesday 28 October 2009 I....

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