Titanic Methods Subtraction of rate of change ie involved real interest rate

# Titanic methods subtraction of rate of change ie

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Titanic Methods Subtraction (of rate of change i.e. % involved, real interest rate) Division (of CPI values in 2 periods) Deflating (division method to base year prices) All give same result Harm from inflation Prices from 1913 (Grand Central Station) 5 cent small coffee 10 cent for a side of fries \$2 for 100% silk scarf QUESTION- Have we been harmed by rising prices? Workers, employers, borrowers & lenders: Wage & loan contracts are in nominal terms Need to predict inflation and plan around it QUESTION- most years real compensation Real change is the change in nominal comp and inflation Anticipated inflation? If so, workers & employers agree to up nominal compensation, all else equal. So you’re coming out ahead basically. Nominal value of most assets (real estate, stocks, collectables, etc,) generally increase with inflation Savings account pay higher nominal interest rates Reat interest rate- nom int. - infla. Unanticipated inflation QUESTION- First job- get a nominal raise. Nominal wage increase in contract is 4%. Expected inflation is 2%. What actually happens is the actual inflation rate rises by 5% You expected an increase in wages of ___ and you actually got ___. 2%, -1% Expected 2% increase in wages, but actually you’re still earning 4% more dollars, but since inflation rose 5% then you would be behind -1% Unexpected inflation: lose of 3% of salary Average penn state grad earns \$50,000 so
unexpected inflation costs you \$1600 Can reduce real wage (bullets above this) Can reduce real interest rates Aids debtors, harms lenders “Inflation is now the lesser evil” Harms of anticipated inflation Menu costs Quite minor, cost of changing prices for example in a restaurant prices for food Value of money declines ex) \$120 for 3% ant. Inflation for a typical household Unanticipated inflation is far more costly than anticipated Feb 14th notes Survey- over the last 20 years or so, what do you think happened to “real median household income?” Why the Fed has a goal of 2% inflation Part of their dual mandate (which also includes stabilize prices, maximum employment) Why not 0% inflation? Stay away from debilitating deflation (deflation is falling prices, disinflation is prices rising more slowly) ex) japan’s lost 20 years Allow for a negative real federal funds rate Set by feds Ex) Now.. .75%-2% + -1.25% Right now interest rates are really low to encourage people to consume more Easier for real prices and wages to fall Economist place interest on prices and wages, example there is a job out there for new graduates that pays about \$100,000 for a 5 year program (pharmacists)... Another major pays \$25,000 you’re less likely to do that, so the price change encourages people to pursue things Ex) nominal wages of workers in cigarette factories decrease Why not higher than 2% More variable and thus less predictable the inflation rate gets if the goal is higher than 2%

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