New User Special Price Expires in

Let's log you in.

Sign in with Facebook


Don't have a StudySoup account? Create one here!


Create a StudySoup account

Be part of our community, it's free to join!

Sign up with Facebook


Create your account
By creating an account you agree to StudySoup's terms and conditions and privacy policy

Already have a StudySoup account? Login here

Princ Of Macroecon

by: Madie Schinner

Princ Of Macroecon ECN 001B

Madie Schinner
GPA 3.57


Almost Ready


These notes were just uploaded, and will be ready to view shortly.

Purchase these notes here, or revisit this page.

Either way, we'll remind you when they're ready :)

Preview These Notes for FREE

Get a free preview of these Notes, just enter your email below.

Unlock Preview
Unlock Preview

Preview these materials now for free

Why put in your email? Get access to more of this material and other relevant free materials for your school

View Preview

About this Document

Class Notes
25 ?




Popular in Course

Popular in Economcs

This 22 page Class Notes was uploaded by Madie Schinner on Tuesday September 8, 2015. The Class Notes belongs to ECN 001B at University of California - Davis taught by Staff in Fall. Since its upload, it has received 11 views. For similar materials see /class/191886/ecn-001b-university-of-california-davis in Economcs at University of California - Davis.


Reviews for Princ Of Macroecon


Report this Material


What is Karma?


Karma is the currency of StudySoup.

You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!

Date Created: 09/08/15
LongRun and Sho Run Concerns Growth Productivity Unemployment and In ation LongRun Output and Productivity Growth Output per worker hour is called labor productivity Forthe 19522000 period labor productivity exhibits an upward trend and fairly sizable uctuations around that trend The growth rate was much higher in the 1950s and 1960s than it has been since the early 1970s Output per Worker Hour Productivity 19522003 LongRun Output and Productivity Growth Part of the reason for the upward trend in productivity is an increase in the amount of capital per worker With more capital per worker more output can be produced per year The other reason productivity has increased is that the quality of labor and capital has been increasing Capital per Worker 19522003 mmmmmmmmmmmm W Capitai perworkergrew untii about 1980 and then ieveied off Real GDP and Unemployment Rates 19291933 and 19801982 PERCEMIAGECHAMGE LINEMPLOYMEMT NuMBEROFLmEMPLOYED AR IN REAL cm RME 1MILLIOMSD PERCENIAGE cnPAcIrv CHANGE unuznnou IMREAL cm PE AGED NuMBEROF MEMPLOVMENI LlMEMPLOYED R mum Si r m Mungumimmmmmmmznmmu 51m Mariamswammints953nms Devamummmmame ulnvanchmxx Defining and Measuring Unemployment The most 39equently discussed symptom ofa recession is unemployment An employed person is any person 16 years old or older39 1 who works for pay either for someone else or W his orherowh business forl orrhore hours 2 who works Without pay for 15 orrhore hours per week h a family e lel pn e or 3 who has a job out has been terhporahiy absenl with orwithout pay Defining and Measuring Unemployment An unemployed person is a person 16 years old or older who i is Networking 2 is available forwork and has made specific efforts to find work during the previous 4 weeks A person who is not looking forwork either because he or she does not want ajob or has given up looking is not in the labor force Defining and Measuring Unemployment Defining and Measuring Unemployment Computing the unemployment rate forthe month of July 2003 Laborforce 14139 million Employed 13347 million Unemployed 792 million Employed Unemployed and the Labor Force 19532002 2 9 W 15 6 mmmmu mm mm mm mm mummy mm EMHDVED UNEMVLDVED mnmmw mmme mums mums mums mums ms me Hi mm WW mama Sm mmmhwnmmmmmms Unemployment Rates for Different Demographic Groups NOVEMBER YEARS 1982 Regional Differences in Unemployment The DiscouragedWorker Effect The discouragedworker effect lowers the unemployment rate Discouraged workers are people who want to work but cannot find jobs They grow discouraged and stop looking for work thus dropping out of the ranks of the unemployed and the labor force The Duration of Unemployment Types of Unemployment Frictional unemployment is the portion of unemployment that is due to the normal working of the labor market used to denote shortrun jobskill matching problems Types of Unemployment Structural unemployment is the portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries Types of Unemployment Cyclical unemployment is the increase in unemployment that occurs during recessions and depressions Types of Unemployment The natural rate of unemployment is the unemployment that occurs as a normal part of the functioning of the economy Sometimes taken as the sum of frictional unemployment and structural unemployment Two Serious Inflationary Periods Since 1970 REcEssIoN INFLATION BEGINS RATE Inflation Inflation is an increase in the overall price level Deflation is a decrease in the overall price level Sustained inflation is an increase in the overall price level that continues over a significant period Inflation and the Business Cycle INFLATION RATE Price Indexes Price indexes are used to measure overall price levels The price index that pertains to all goods and services in the economy is the GDP price index The consumerprice index CPI is a price index computed each month by the Bureau meant to representthe market ba t purchased monthly by the typical urban consumer Price Indexes Educatiun and Rama Cumrrunicatiun WEI Gun 5 9 5 W a s nu Services Medical Care E El Transpunatiun Beverages l7 3 IE E n Apparel 42 Huusing 4n 9 The CPI market basket shows how a typical consumer divides his or her money among various goods and services The Consumer Price Index CPI PERCENTAGE PERCENTAGE PERCENTAGE CHANGE IN ci The Costs of Inflation People s income increases during inflations when most prices including input prices tend to rise ogether Inflation changes the distribution of income People living on fixed incomes are particularly hurt by inflation The Costs of Inflation The benefits received by many retired workers including social security are fully indexed to inflation When prices rise benefits rise The poor have not fared so well Welfare benefits are not indexed and have not kept pace with inflation The Costs of Inflation Unanticipated inflation an inflation that takes people by surprise can hurt creditors I debtors inflationt atI lower than expected benefits creditors Inflation that is higherthan ex ected bene s The real interest rate is the difference between the interest rate on a loan and the inflation rate The Costs of Inflation In ation creates administrative costs and inef ciencies Without in ation time could se more ef ciently The opportunity cost ofholding cash is high during in ations People therefore hold less cash and need to stop at the bank more often People are not fully informed about price changes and may make mistakes that lead to a misallocation of resources The Costs of Inflation Some people consider inflation to be our public enemy num er one Elected leaders have vigorously pursued policies designed to stop inflation The recessions of 1974 to 1975 and 1980 to 1982 were the price we had to pay to stop inflation Stopping inflation is costly Fall 2005 01B Principle of Macroeconomics Prepared by MeiXin 121405 Notes for Final in IE Suggestions Do your homework and two midterms again Read your textbook and lecture notes Practice the test sample 1 Main points after the second midterm 6070 in your nal 1 Comparative advantage CA and Absolute Advantage AA Absolute advantage AA refers to productivity as in the producer who can produce a product at a lower absolute production cost in terms of the resources used in production One country can have AA in all kinds of Goods Comparative advantage CA refers to the producer who can produce a product at a lower opportunity cost One country can only have CA in one Good Opportunity cost OC what is given up in order to produce one more particular good Comparative advantage is based on opportunity cost Lower OC in one good means the country has CA in this good 2 CA and international trade hours for one unit of Wheat hours for one unit of Car OC of Wheat OC of Car One American 2 16 18 Car 8 Wheat One Canadian 3 30 1 10 Car 10 Wheat Step 1 OC PPF and Autarky Point OC this is very easy please check them in the table above American has CA in producing Car and Canadian has CA in producing Wheat PPF because 0C is constant therefore the PPF is a straight line Canadian and American both have 240 hours Cjkr Canadian Car American 15 8 F C E quotk D80 wheat whea Autarky the same point production and consumption without trade Canadian Point C 60 2 American Point A1 13 Fall 2005 01B Principle of Macroeconomics Prepared by Meixin 121405 Step 2 With trade dilTerent points of consumption and production International price 2 car 18 wheat 1 car 9 wheat The range of International Price for car in terms of wheat 8 9 In this range both of them are willing to trade Otherwise either of them will refuse to trade Therefore the highest price for car in terms of wheat is 9 the lowest is 8 Production Points Canadian Point D 80 0 American Point B 0 15 Consumption Points Canadian Point E 62 2 American Point F 18 13 Both of them are better off than their Autarky points Canadian Point C 60 2 American Point A1 13 3 Tariff effects in the international trade Step 1 Before tariff Quantity of international trade imports 2 Price P2 Consumer surplus ABCD Producer surplus E Step 2 After tariff Quantity of international trade imports 1 less than imports 2 Price P1 higher than P2 Consumer surplus AB Producer surplus EC Tax income D DeadweightlossFA D b G Supply Price of Televislnns U H Demand W Im or 5 Quantity of p t 2 Televlslons 4 Quota Look your answer keys in Problem set 3 5 Real Exchange rage appreciation and devaluation Open economy Real Exchange rage change demand and supply system Appreciation results net exports and net capital out ow decrease Devaluation results net export increase Calculation The Ratio of Price in two countries Fall 2005 01B Principle of Macroeconomics Prepared by Meixin 121405 6 Aggregate Demand and Supply Reasons for Change not only the original factors we learned in Chapter 4 four factors will shift the supply curve and five factors will shift the demand curve and also include the change of money supply net export investment exchange rate Why shortrun Aggregate Supply curve slopes upward but Longrun Aggregate Supply is vertical find the answer in your textbook and lecture notes Graphs Demand related fators Demand is increasing Demand decreasing Demand Curve shift right Demand Curve shift left Shortrun Output Increase Shortrun Output Decrease Shortrun supply curve shift left Shortrun supply curve shifts right Longrun Price increase Longrun Price decrease Longrun Output Unchange Longrun Output Unchange P1 3 P2 P3 Y1 Y2 Quantlty of Output Quantity of Output Supply related factors Technology advance supply increase Other factors influence Supply Shortrun supply curve shift right Longrun Output Unchange Demand Curve unchange just follow the above method Shortrun Output Increase Longrun Price decrease Longrun Output increase LRAS LRASg Price Level 5 Y1 Y2 Quantity of Output Fall 2005 01B Principle of Macroeconomics Prepared by Meixin 121405 II Main points before the second midterm 1 Ten principles 2 Markets Four types with different propelties check them in lecture notes 3 Elasticity the rst midterm Price elasticity of demand income elasticity of demand Price elasticity of supply Price elasticity of demand Q2Ql Q2Ql P2Pl P2Pl Income elasticity of demand Q2Ql Q2Ql IZIl 12Il 4 EITects of Government Tax the rst midterm Price change Consumer surplus Producer surplus change Pnco 1o 7 7 7 7 7 7 7 n 0 3 o 6 o Quantlly 5 GDP expenditure approach 1 Income equals expenditure Y C I G NX 2 Income equals the uses of income Y C S T 3 Household saVing S private is income minus net taxes and consumption expenditure SprivateY39 C T S public T i G I SprivateT G M lt 6 Quantity equation about Money supply and production MVPY Money supply multiplier lreserve ratio or llmarginal propensity to consume Private Consumption C a b YD Disposable income YD Y 7 T Marginal Propensity to Consume b Marginal Propensity to save lb Money MultiplieF L l MPC 1 b Fall 2005 01B Principle of Macroeconomics Prepared by MeiXin 121405 7 GDP De ator Chain weighted output index Case one given the price and quantity in two or three years you are required to calculate the GDP De ator In this case you can follow the method in the notes on GDP Calculator Notes 1 in my homepage Year Price Quantity NGDP Real GDP GDP De ator 1999 Good 1 2 100 290 290 100 Good 2 15 60 2000 Good 1 l 80 140 Good 2 l 60 Step 1 Choose 1999 as base year Use the prices in 1999 calculate the GDP in 2000 NGDP1999 2 10015 60290 GDP2000 2 8015 60250 Growth Rate 1 100250 290290 1379 Step 2 Use the prices in 2000 calculate the GDP in l999 GDP1999 l 1001 60160 NGDP20001 801 60140 Growth Rate 2 100 140 160160 125 Step 3 average these two Growth Rates AGR 125 13792 13145 Step 4 Real GDonoo 1 13145290251ss Case two Given GDP De ator you are required to calculate the real GDP Year NGDP GDP De ator base year is 1996 1999 290 105 2000 200 150 Calculate the RGDP of 2000 based on 1999 RGDonoo 200105150 140 Calculate the RGDP of 1999 based on 2000 RGDP1999290150105 41423 Fall 2005 01B Principle of Macroeconomics Prepared by Meixin 121405 8 CPI and in ation In ation Costs Please Check your lecture notes Year Price Quantity CPI 1999 base year 1999 Good 1 2 100 100 Good 2 15 60 2000 Good 1 1 80 Good 2 1 60 2001 Good 1 3 100 Good 2 2 100 Step 1 choose 1999 as our basic year The quantities for these two goods in 1999 are xed and in our basket Cost or Expenditure in 1999 21001560290 Cost or Expenditure in 20001100160160 Cost or Expenditure in 20013100260420 Step 2 Calculation the CPIs CPI in 1999 100290290 100 CPI in 2000 100160290 552 CPI in 1999 100420290 1448 Step 3 Calculation on in ations INF in 1999 100100100100 0 INF in 2000 100552100100 448 INF in 1999 1001448552552 1623 V Interest Rate and Investment Interest Rate is the price of Funds or money or bonds You can use demandsupply system to explain how it changes in the loanable fund market or bond market according to change in supply or in demand 2 Fisher Effect Real interest rate Nominal interest rate 7 In ation University of CaliforniaDavis TA Jason Lee Economics lBIntro to Macro Email jawleeucdavisedu Handout 3 An ideal economy is one in which there is rapid growth of output low unemployment and low in ation The problem is that economies rarely achieve this ideal standard A key part of macroeconomics is studying what determines output unemployment and in ation But before looking at the determinants we have to be able to understand how we measure these macroeconomic concerns In the last handout we learned how to measure output GDP In this handout we will brie y mention some features of US economic growth and business cycles and then focus on measuring unemployment and in ation Comments on Output and Economic Growth Since 1900 the US Economy has grown about 35 a year Growth Theory studies the factors that affect the average growth rate of output Long term growth can increase due to one or both of the following a Increase in the amount of factors of production b Technological progress increase in knowledge Potential GDP is the total amount of goods and services that could potentially be produced if all factors of production were fully employed Actual GDP has kept pace with potential b In the long run our resources have been fully employed GDP per capita per person has also been increasing in the US Costs and Benefits of Growth a Increase in Pollution Cost b Increased living standards Benefit mw 0 WU Business Cycles Business Cycles a Ups and downs of GDP are called business cycles b Movement towards higher GDP is called an expansion Movement toward lower GDP is called a recession c Are recurrent but not periodicThey occur over and over again but they are not exactly the same d Variables that move with GDP are called procyclical Variables that move against GDP are called countercyclical Prices are generally considered procyclical While unemployment would be a countercyclical variable Recession a Roughly speaking it is a period in which real GDP declines for at least two consecutive quarters b Since 1970 there have been 4 recessions 197475 198082 199091 2001 They have differed in duration and severity 3 03 III Unemployment Defining and Measuring Unemployment gt a Statistics based on survey of households by the Bureau of Labor Statistics b Civilian noninstitutional population excludes minors elderly in care centers armed forces inmates c Civilian Labor Force Not in the Labor Force Labor force is defined as someone who is willing to work and has made an effort to find work Not in the labor force is defined as someone who is not employed and has not tried to find work d Labor Force Employed Unemployed Unemployed e Unemployment Rate LaborForce f Discouraged worker is someone who is unemployed but recently stopped looking for work because heshe became discouraged They are not included in the labor force B Interesting Facts about Unemployment There are large differences by gender age and races July 2003 i Teens 156 vs Adults 49 ii Women 48 vs Men 49 iii African American 12 vs Whites 55 b Different states and regions have different unemployment rates i Florida 52 vs Michigan 66 C Can we eliminate unemployment a We don t live in a society where you are stuck in ajob for life Ifyou don t like yourjob you are free to quit Likewise if your employer doesn t like your performance they are free to fire you as well Thus at any given moment people are moving from one job to another This is called frictional unemployment This can be a good thing since people will find jobs that will make them happier and hopefully more productive b Unfortunately not all industries are able adapt to a changing economy and thus workers in those industries lose their jobs forever The best example is the typewriter industry With the advent of the personal computer typewriters became obsolete The jobs held by workers in that industry were lost forever This is an example of structural unemployment c Both frictional and structural unemployment will always be present in an economy thus the combined rates of frictional and structural unemployment is called the natural unemployment rate d Cyclical unemployment is unemployment that is occurs during recessions and depressions Recall that during recessions the economy produces less than potential not all labor is used Total Unemployment Rate Cyclical Unemployment Natural Unemployment Rate D Costs of Unemployment a Economic Cost Cyclical unemployment means that not all labor that is willing to work can find jobs These workers could have been hired and the economy could have produced its potential GDP The gap between potential and actual GDP is the cost of cyclical unemployment b Social Cost Unemployed people suffer personal economic hardships anxiety depression deterioration of health drug abuse leading to suicide The moral is don t be unemployed IV In ation In ation is the increase in the overall price level A Measuring In ation a GDP De ator The problem is that GDP De ator includes every good and service produced in the economy not everyone buys a Aircraft Carrier b Consumer Price IndexCPI Prices of a basket of goods purchased monthly by a typical urban household Most widely quoted measure B Problems with the CPI a Typical basket of goods change over time Ifwe look at the 19821984 basket consumers were buying cassette tapes Does anyone still use cassette tapes today b CPI ignores quality improvements Computers might be included in the 1984 basket of goods But a computer today is so much more advanced than the Apple II or IBM computer of the 1980s But the CPI does not measure such differences In ation Rate x100 CPI 2 CPI 1 11 C Costs of In ation a Distributional Effects In ation does not affect everyone in the same way i Due to people purchasing different products ii Due to the fact that some people s income does not keep pace with in ation b Effects on Debtors and Creditors i Real interest rate nominal interest rate 7 in ation rate ii High in ation can hurt creditors benefits debtors iii Low in ation can hurt debtors benefit creditors c Anticipated vs Unanticipated In ation i Exante real interest rate nominal interest rate 7 expected in ation rate ii Expost real interest rate nominal interest rate 7 actual in ation rate iii Anticipated in ation Will not hurt anyone iv Unanticipated In ation Actual In ation 7 Anticipated In ation v Unanticipated in ation will hurt creditors and benefit borrowers vi Unanticipated in ation explains Why the economy does not like it when prices re volatile d MenuCatalog costsIf prices remained unchanged no need for new catalogs e Higher uncertainly leads to less investment spending D Benefits of In ation a If prices rise faster than wages then firms will produce more and keep unemployment low Practice Problems Question 1 In April 2000 economists were saying that the US economy was close to full employment even though the unemployment rate was 38 Are they dumb Answer Full employment is another term for the natural rate of unemployment What they are saying is that there is no unnecessary unemployment cyclical unemployment Labor is being fully utilized because the only unemployment is natural Thus the economy can be at a full employment with a 41 unemployment rate provided that 41 unemployment is frictional and structural only Economists are never dumb Question 2 How would the Bureau of Labor Statistics characterize the following individuals a Your wonderful Economics 1B TA b The world s oldest woman who lives in a retirement home in Prescott AZ c The world s second oldest woman lives by herself in Yuma AZ and works as a greeter at a Walm art d Scott Peterson who did some bad things and ended up in California s Death Row e Karen who has graduated from Chico State last June has is still looking for work f Karen gets frustrated that no one respects her Chico State degree and decides to move back to her parents home and watch TV all day g A Navy Capitan aboard the USS Seattle Answers a Your wonderful Economics 1B TA is a civilian he is in the labor force and he is employed b The World s oldest woman is not considered part of the civilian population c The World s second oldest woman is a civilian she is in the labor force and she is employed d Scott Peterson is not part of the civilian population e Karen is a civilian she is in the labor force she in unemployed f Karen is a civilian she is not in the labor force she is a discouraged worker g The Navy Captain is not a part of the civilian population Question 3 1n the country of Chad there are 187 jobs that are currently filled There are 13 jobs that are currently unfilled There are 48 people searching for jobs What is the unemployment rate What is the rate of natural unemployment What is the rate of cyclical unemployment What is the relationship between actual GDP and potential GDP Answer Unemployment Rate 48235 204 Natural unemployment rate 13235 55 Cyclical Unemployment Rate 35235 149 Since u gt uquot then it must be that actual GDP is lower than potential GDP Question 4 1n the country of Chad there was an overthrow of the government The benevolent military dictatorship institutes economic reforms that revitalize the economy and create more jobs Thus in this situation there are 222 jobs that are currently filled There are 13 jobs that are unfilled with 13 people searching for jobs What is the unemployment rate What is the natural rate of unemployment What is the cyclical rate of unemploym ent What is the relationship between actual GDP and potential GDP Answer Unemployment Rate 13235 55 Natural unemployment rate 13235 55 Cyclical Unemployment Rate 0235 0 Since u uquot then it must be that actual GDP is equal to potential GDP Question 5 Suppose that the CPI for 2002 was 145 while the CPI for 2003 was 160 What was the rate of inflation Answer 160145145 1034 Question 6 Distributional Effects Suppose the only goods in the market are apple pies and pumpkin pies We have two consumers in the market Sara Lee and Marie Calendar By amazing coincidence both Sara and Marie have the same income of 1000 They spend all their income on pies Suppose that also by amazing coincidence the price of each of the pies is 5 However Sara really likes apple pies so she buys 150 apple pies and only 50 pumpkin pies Marie is just the opposite she is a big fan of pumpkin pie so she buys 150 pumpkin pies but only 50 apple pies a Suppose the prices of both apple and pumpkin pies increase by 10 and income increases by 10 as well Are there any distributional effects If so who is the winner and who is the loser b Suppose there was a bad harvest for apples but a very good harvest for pumpkins The price of apple pies increase by 20 while the price of pumpkin pies do not increase Your income has increased by 10 Are there any distributional effects If so who is the winner and who is the loser Answer a For Sara and Marie the prices have increased by 10 So now the price of both apple and pumpkin pies is 550 Their salary has increased by 10 as well to 1100 For Sara her budget is 150550 50550 1100 For Marie her budget is 50550 150550 1100 Thus both are able to buy their old bundles at the higher price level There is no distributional effect bNotice that the average price level increases by 10 however only apple pies have increased in price We would assume that such changes will hurt Sara more than Marie since Sara is the big apple pie consumer Both of their budgets have increased by 10 to 1100 For Sara her budget is 150600 505 1150 For Marie her budget is 506 1505 1050 Sara can no longer afford her old bundle under these prices while Marie can still afford her old bundle Thus inflation has created a distributional effect where Sara is worse off under in ation she needs to come up with 50 to buy her old bundle while Marie is better off she has 50 left to spend Question 7 Debtors and Creditors Example Suppose that we live in an economy where donuts are the only good produced and consumed pretty boring economy Suppose the price of donuts was 5 each and Homer has 100 in his pocket How many Donuts could Homer buy right now 1005 20 donuts Suppose Moe comes to Homer and borrows 100 promising to pay the money back plus 10 interest next year 110 next year Suppose the price of donuts increase by 5 How many donuts can Homer buy next year when Moe pays him back 110525 Z 21 donuts 1s Homer better or worse off Clearly Homer is better off since he has 1 extra donut he has 5 more donuts than he did last year The 10 increase in actual dollars is called the nominal interest rate The 5 increase in the good real purchasing power is the real interest rate Note the following approximate relationship Real interest rate Nominal Interest rate 7 Rate of In ation Real interest rate 10 5 5 in our example How has Moe fared in this scenario Moe is actually worse off in this situation Suppose Moe borrowed the 100 from Homer so that he could buy 20 donuts this year After one year he will have to sell 21 donuts so he can pay back Homer Thus Moe borrowed 20 donuts but has to pay back 21 donuts Suppose the price of donuts increases by 20 the next year What is the nominal interest rate What is the real interest rate Is Homer better or worse off How does Moe fare Nominal interest rate 10 In ation rate 20 Real interest rate 10 20 10 Homer is still going to get 110 back from Moe next year but the price of donuts have now increased to 6 Homer can only buy 1106 Z 18 donuts next year He is clearly worse off since he could have had 20 donuts this year Moe is doing better he has borrowed 20 donuts this year but next year he only has to pay back Homer 18 donuts What is the moral of the story Debtors gain lenders lose when in ation is high Lenders gain and debtors lose when in ation is low Question 8 Unanticipated vs Unanticipated In ation Suppose the Godfather Don Corleone has heard news that the in ation rate will be 5 next year The Godfather will therefore that next year prices will rise by 5 What interest rate should he charge if he were to lend out money If the Godfather charges 5 he would not expect his real well being to increase next year He expects that he will receive exactly the same amount next year that he gave you this year We will assume the Godfather is not a nice guy so he expects something in return for lending money So we would expect the Godfather to charge an interest rate higher than 5 Suppose Mario needs money badly to keep his business a oat and he has no choice but to go to the Godfather He also anticipates that in ation will increase 5 next year Suppose the Godfather makes Mario an offer he can t refuse and charges him 10 nominal interest What is the expected increase in the Godfather s real purchasing power The question basically asks what the Godfather s expectedreal interest rate will be This is also known as the ex ante real interest rate Exante real interest rate 10 5 5 Suppose next year rolls around andDon Corleone s prediction of the in ation rate was correct at 5 What is his ex post real interest rate Are there any winners or losers Expost real interest rate 10 5 5 In this situation both the Godfather and Mario will be happy The Godfather will be happy because his real purchasing power has increased by 5 which is what he required when he gave out the loan Mario will not be worse off either since he was willing to pay the real interest rate Since both parties correctly anticipated in ation rate and factored it in the nominal interest rate neither party got hurt when actual in ation equaled the anticipated in ation The key point is that anticipated inflation will not hurt either debtors or creditors


Buy Material

Are you sure you want to buy this material for

25 Karma

Buy Material

BOOM! Enjoy Your Free Notes!

We've added these Notes to your profile, click here to view them now.


You're already Subscribed!

Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'

Why people love StudySoup

Jim McGreen Ohio University

"Knowing I can count on the Elite Notetaker in my class allows me to focus on what the professor is saying instead of just scribbling notes the whole time and falling behind."

Allison Fischer University of Alabama

"I signed up to be an Elite Notetaker with 2 of my sorority sisters this semester. We just posted our notes weekly and were each making over $600 per month. I LOVE StudySoup!"

Steve Martinelli UC Los Angeles

"There's no way I would have passed my Organic Chemistry class this semester without the notes and study guides I got from StudySoup."


"Their 'Elite Notetakers' are making over $1,200/month in sales by creating high quality content that helps their classmates in a time of need."

Become an Elite Notetaker and start selling your notes online!

Refund Policy


All subscriptions to StudySoup are paid in full at the time of subscribing. To change your credit card information or to cancel your subscription, go to "Edit Settings". All credit card information will be available there. If you should decide to cancel your subscription, it will continue to be valid until the next payment period, as all payments for the current period were made in advance. For special circumstances, please email


StudySoup has more than 1 million course-specific study resources to help students study smarter. If you’re having trouble finding what you’re looking for, our customer support team can help you find what you need! Feel free to contact them here:

Recurring Subscriptions: If you have canceled your recurring subscription on the day of renewal and have not downloaded any documents, you may request a refund by submitting an email to

Satisfaction Guarantee: If you’re not satisfied with your subscription, you can contact us for further help. Contact must be made within 3 business days of your subscription purchase and your refund request will be subject for review.

Please Note: Refunds can never be provided more than 30 days after the initial purchase date regardless of your activity on the site.