Principles of Economics- Mankiw (5th) 631

Principles of Economics- Mankiw (5th) 631 - CHAPTER 28 M O...

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CHAPTER 28 MONEY GROWTH AND INFLATION 651 regardless of inflation. If there is no in- flation, in 20 years the pension will have the same purchasing power that it does today. But if there is an inflation rate of only 3 percent per year, in 20 years your pension will be worth only $5,540 in today’s dollars. Five percent inflation over 20 years will cut your purchasing power to $3,770, and 10 percent will reduce it to a pitiful $1,390. Which of these scenarios is likely? No one knows. Inflation ultimately depends on the people who are elected and ap- pointed as guardians of our money supply. At a time when Americans are liv- ing longer and planning for several decades of retirement, the insidious ef- fects of inflation should be of serious concern. For this reason alone, the cre- ation of inflation-indexed bonds, with their guarantee of a safe return over long periods of time, is a welcome de- velopment. No other investment offers this kind of safety. Conventional govern- ment bonds make payments that are
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