Unit 2 notes: 02/02/16

Inflation= Price index in year 2 - price index in year 1  x 100
                             Price index in year 1

Real vs. Nominal Interest Rate 

Nominal Interest Rate- percentage increase in money that the borrower must pay the lender for a loan. 

Anticipated inflation (also known as the "fisher effect") = expected rate of interest + inflation premium

Real Interest Rate (adjusted for inflation) = nominal IR - inflation 

Unanticipated Inflation- percentage increase in purchasing power that the borrower must pay lender for a loan 

Unanticipated Inflation 

Hurts 

1. savers
2. creditors/ lenders
3. people in a fixed income such as  the elderly, welfare, social security, medicare, medicaid 

Helps 

1. debtors- they are locked in at that rate, the money that they pay back to lender has less purchasing power

Cost Of Living Adjustment 

Cola- an automatic wage increase when inflation occurs