Inflation and Interest Rates

Inflation and Interest Rates - Inflation and Interest Rates...

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Inflation and Interest Rates -Every items price includes the cost of producing it, and then the cost added to gain revenue Cost Push Inflation : -OPEC higher prices in 1973: Oil prices shoot up by four times worldwide. -Significant production commodity increases in cost, therefore, the only way to gain back lost revenue by this price increase is to increase price of commodity being produced by the firm. Why is it important to know the level of inflation? 1. Federal monetary policy 2. Cost of living adjustments: every single individual who receives public transfer payments (These payments are adjusted due to inflation rates). -Federal employees receives this cost of living adjustment, and increase in payment based on merit. -The inflation rate monitored by the government is on average 1% higher than it actually is. This is a huge long-run problem. This plays into the debt crisis. 3. In order to be able to make the adjustment between nominal to real incomes. We need to see how the standard of living is changing. Two Ways to calculate : -The percentage change in real wages= the percentage change in nominal wages- percentage of inflation -The real wage (t)= Nominal Wage (t)/ CPI (t) X 100 -Non-supervisory workers : the workers below the managerial level. -Significant decline between 1975 and 1995 in wages in the non-supervisory workers.
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Inflation and Interest Rates - Inflation and Interest Rates...

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