● 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% ○
You've reached the end of your free preview.
Want to read all 39 pages?