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Quiz Results

Quiz Results

DEFINITIONS INFLATION - A LOSS IN THE PURCHASING POWER OF MONEY OVER TIME DEFLATION - PRICES DECREASE OVER TIME CONSUMER PRICE INDEX (CPI) - COST OF A COMPOSITE OF GOODS COMPARED TO AN EARLIER TIME BASE PERIOD - TIME TO WHICH WE ARE COMPARING PRICES PRODUCER PRICE INDEX - PRICE INDEX FOR VARIOUS INDUSTRIAL PRODUCTS COST OF LIVING INDEX - INCLUDES CHANGES IN BUYING HABITS

CALCULATING AVERAGE INFLATION RATES FROM SUCCESIVE INDECES: FROM TWO POINTS IN TIME (single payment compound amount factor)

EXAMPLE THE PASSENGER CAR INDEX WAS 113 IN 1988. IT HAD RISEN TO 133.9 IN 1994. THE AVERAGE INFLATION RATE WAS (A SPECIFIC INFLATION RATE): fj = (133.9/113)1/6 -1 = 2.9 % WE CAN COMPARE THIS WITH THE CHANGE IN THE CPI OVER THE SAME PERIOD (THE GENERAL INFLATION RATE): = f (CPI) = (148.2/118.3)1/6 -1 = 3.8% WHAT DOES THIS SAY ABOUT THE RELATIVE COST OF CARS DURING THAT PERIOD? CURRENT CPI = 237.805

Recent Inflation Rates CPI

ACTUAL AND CONSTANT DOLLARS CONSTANT DOLLARS = CONSTANT PURCHASING POWER INDEPENDENT OF THE PASSAGE OF TIME (A’n) ACTUAL OR CURRENT DOLLARS (REAL) - ESTIMATES OF FUTURE CASH FLOWS TAKING INTO ACCOUNT INFLATIONARY EFFECTS (An ) EXAMPLES 11.3 AND 11.4

INTEREST RATE DEFINITIONS MARKET INTEREST RATE(i) (INFLATION ADJUSTED MARR) - TAKES INTO ACCOUNT EARNING POWER AND INFLATION EFFECT (USED MOST FREQUENTLY) INFLATION FREE INTEREST RATE(i’) (REAL INTEREST RATE)- TRUE EARNING POWER OF MONEY EVERYTHING WE HAVE DONE SO FAR THIS SEMESTER USED MARKET INTEREST RATES

RECENT INFLATION RATES

YEARS OF HIGH INFLATION

SOME HISTORICAL (AND HISTORIC) EXAMPLES GERMANY 1923 (2/23 T0 12/23) HUNGARY 1945 NYT story from 1945: INFLATION IN HUNGARY; National Bank Pays at Rate of 8,250 Pengos to Dollar HUNGARY TO SLASH LIVING STANDARDS; Drastic Cuts Ordered ... Inflation-crazed Hungary, rocking under the impact of the maddest of all currency debacles, in which one United States cent is worth trillions of pengoes, is going ...

SOME HISTORICAL (AND HISTORIC) EXAMPLES Inflation Becomes Nightmare in Hungary With Value of Pengo ... BUDAPEST, Hungary, April 4 (Delayed, London Times dispatch) --In Budapest inflation has now become a nightmare, with nothing ... like it except the German ... April 6, 1946 - By Wireless to THE NEW YORK TIMES. - Business & Finance - Article - Article - Article - Article - Print Headline: "Inflation Becomes Nightmare in Hungary With Value of Pengo Dropping Steadily USA 1970’S Zimbabwe, a few years ago Veneszela now

POSTAGE STAMPS OF 1923 - 1

POSTAGE STAMPS OF 1923 - 2

POSTAGE STAMPS OF 1923 - 3

POSTAGE STAMPS OF 1923 - 4