bbvista pp economic and industry analysis

Redistribution of income between borrowers and

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Unformatted text preview: from increase in resource prices (wages, energy, commodities, etc.) Initially decreases GDP If MS ⇑ ⇒ D ⇑ ⇒ P ⇑ ⇒ if input P⇑ ⇒Inflation (1970 oil crisis) Unanticipated Inflation: Unexpected decrease in future purchasing power. Redistribution of income between borrowers and lenders Long term contract such as 30-year fixed mortgages decrease in value, good for consumer with fixed mortgages, hurts banks (2008-2009 liquidity crisis) Value of wages decrease hurts employers, employees will demand higher wages. Unanticipated Decrease in Inflation: Banks win, consumers lose. Employers win (value of wages increase), Employees lose. Anticipated Inflation: Price levels rise but the economy operated at potential GDP Money is a poor store of value. (2002-2005) Taxes have a negative impact on economic output, because it distorts returns. Tax impact on investor’s ROI Tax impact on investor’s ROI Return 9% Inflation rate (π) 3% Return after π 6% 5% 3% 2% 3% Tax rate Real ROI 30% after Tax 3.3% 2% 30% 0.5% ­1% 30% ­1.6% Note: Taxes are paid on the gross return (9%, 5%, 2%) low after tax returns reduce savings i.r ...
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