# Class+2 - Econ 100B - Fall 2009 Prof: Martha Olney, GSI:...

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Econ 100B - Fall 2009 Prof: Martha Olney, GSI: Victoria Vanasco Handout 2 - Tuesday, September 1st, 2009 1 Macroeconomic Variables a. Real GDP b. Unemployment rate c. d. Interest Rates (real vs. nominal) e. Stock Market f. Exchange Rate (nominal e vs. real " = eP P ) 2 Interest Rates: Nominal vs. Real The following investment is available: \$1 !! (1 + i )\$1 This means the nominal interest rate is i: Now, if prices did not change in this period P = 0 , then we also say that i is the real interest Ultimately we want the money to consume, so what we care about is the amount of good we can buy with the money we earned, if by investing one period we earn a 5% nominal interest rate, but prices have increase 20%, then we can buy less goods after investing than before, then we might prefer not to invest and buy the goods initially. To see this, suppose the price of the basket we consume is given by P , the price index. Then, by spending \$ P we get to consume our basket (and we±re happy). Suppose I want to invet today, so I decide not to consume the basket today, I sell the basket (get \$ P ) ; and invest it: \$ P !! (1 + i )\$ P 1

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Now, with the money we made, we want to buy our basket and still P; so we can buy: # baskets = Money I have Price of Basket = (1 + i )\$ P \$ P = 1 + i So my real interest rate is i;
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## This note was uploaded on 02/04/2011 for the course ECON 100B taught by Professor Wood during the Fall '08 term at University of California, Berkeley.

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Class+2 - Econ 100B - Fall 2009 Prof: Martha Olney, GSI:...

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