1. Ms. Park

2.  Amy

3.  What’s the difference between CPI and GDP deflator?  What do you use when you want to calculate Real income? Real GDP?

4.  Inflation redistributes purchasing power among different groups in ways that can be both economically harmful and unjust; purchasing power keeps pace with inflation for some individuals, but not for others.

5.  What are: a) Full indexation b) Partial indexation c) Fixed incomes  Full indexation: nominal income rises at the inflation rate  Partial indexation: nominal income rises at less than the inflation rate  Fixed incomes: nominal income stays constant

6. Household incomes:  Inflation means not only increasing prices but expanding nominal incomes as well.  The effect on households’ purchasing power depends on which is greater- inflation or the increase in nominal income.  Loosing purchasing power, maintaining purchasing power, gaining purchasing power.

7.  Inflation can also redistribute purchasing power between borrowers and lenders ◦ actual inflation > anticipated inflation  Borrowers win ◦ actual inflation < anticipated inflation  Lenders win ◦ actual inflation = anticipated inflation  No one affected

8.  Nominal interest rate: the interest rate expressed in money terms  Real interest rate: nominal interest rate – inflation rate  Inflation premium: % built into a nominal interest rate to anticipate the rate of inflation for the loan period *Inflation premium = anticipated inflation  Desired real interest rate = Nominal interest rate - inflation premium

9.  The nominal interest rate is 8%, the inflation premium on loans is 3%, and actual rate of inflation 5%.  What is the real interest rate? Find the difference between this rate and the desired real interest rate and explain how any difference affects borrowers and lenders.