Inflation rate: the notion that prices are consistently rising at a certain rate.

When a country encounters hyperinflation they become very sensitive to

inflation.
Acountants look at individual components of inflations and analyze why
inflation went up or down. Economists want to know what causes inflation.
What causes inflation is mismanagement of monetary policy.
CPI is the prices (on average) of a basket of goods (a typical household
consumes).
Inflation rate: compare CPI in one year, using a base year as a point of
reference.
GDP deflator = same price levels and different quantities
CPI calc = same quantities and different price levels
Limitations
The basket is the same for 10 years
Assumes the basket of goods is constant throughout the years
Technology changes a lot in 10 years
Nominal vs real
Nominal is the actual value
Real is adjusted to inflation real value (what my income can
purchase)
Nominal interest rate =
Interests rates occur because
The person needs to be compensated for not having that money in the
bank creating earnings (real interest rate)
Bike prices will go up. Therefore, the IR must be higher that the
expected rate of inflation
He will give you 60
o 30 will be to compensate
o 30 will be because the price of the bike next year will be 1030
instead of 1000
the gap between the nominal and real interest rates have become closer and
closer. This occurs because inflation rate is decreasing and people have zero
expectation for inflation.

Inflation can substract from wages (when wages remain the same and
inflation goes up).
Unanticipated inflation
The worst of all (you can build it into loans etc).
Deflation
Nobody buys anything. The only things you buys are absolute necessities.
People keep postponing purchases. Example: Japan and Europe. It can lead
to a recession
Financial system
System of funneling money from --- to investors. When you put your money
in the bank and it takes our savings to make loans the bank is acting as a
financial intermediary (institutions who channel savings). Financial
intermediaries charge too much for doing this.
That is why there was the notion that bankers did little work and got paid a
lot. Markets have taken the role of financial intermediaries. They do it more
efficiently and both parties win.
Three key
- you have quick access to your assets. The most illiquid asset is real
state
savings
private: when we do not consume all of our income
public
savings = investment
loanable funds: they are supplied by households, other countries and
corporations. They are demanded by people who want to invest.
The govt is the entity that borrows the most money. If public savings go
down, interest rates go up. The government takes more money than it should
and people have less money to borrow. This is called crowding out. Occurs
because govt is grabbing funda from the market. Also because higher IR
makes people want to borrow less.
Negative connotation the govt is grabbing the supply of savings and
decreasing the amount of private savings and therefore investment.

Foreigners give the US their money they supplement their weak domestic
savings.
The business cycle
shrinking recession from peak to trough
increasing inverse
recessiong at the beginning it declines at a slower rate. By the half of the
increasing curve, the economy actually starts to positively increase. ????