Econ2102_Lecture4_handout

People with debts can pay back their loans with new

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Unformatted text preview: 0.0  ­5.0 Apr ­1972 Apr ­1976 Apr ­2012 Dec ­2010 Aug ­2009 Apr ­2008 Dec ­2006 Aug ­2005 Apr ­2004 Dec ­2002 Aug ­2001 Apr ­2000 Dec ­1998 Aug ­1997 Apr ­1996 Dec ­1994 15.0 Aug ­1993 Apr ­1992 Dec ­1990 Aug ­1989 Apr ­1988 Dec ­1986 Aug ­1985 Apr ­1984 Dec ­1982 Aug ­1981 Apr ­1980 Dec ­1978 5.0 Aug ­1977 •  The nominal interest rate is generally high when inflation is high. Dec ­1974 Real interest rate Dec ­1970 Nominal interest rate Aug ­1973 8/4/11 •  The Fisher equation Rate of inflation •  Empirically –  The real interest rate has been negative –  This implies that in the short run the real interest rate need not equal the MPK. Australian Interest Rates 1970 ­2011 25.0 20.0 10.0 Nominal Real  ­10.0  ­15.0 16 8/4/11 8.4 Costs of Inflation •  Individuals who are hurt during inflation: –  An individual who has a pension that is not indexed to inflation –  A bank that issues loans at fixed rates but that pays interest rates that move with the market –  An individual with a variable rate mortgage •  Large surprise inflations can lead to large distributions in wealth. –  People with debts can pay back their loans with new cheaper dollars. –  Creditors wind up losers. •  Inf...
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