Inflation
Real Interest rate- % increase in purchasing power the borrower must pay the lender for a loan adjusted for inflation
Nominal Interest rate- % increase in money the borrower must pay the lender for a loan NOT adjusted for inflation
Formulas- Real interest rate = Nominal interest rate - Inflation
Anticipated inflation (Fishen Effect)
Nominal Interest Rate = Expected interest rate + Inflation premium
Unanticipated inflation - unknown
Hurt by Inflation
1.Savers
2. lenders/creditors
3. People on a fixed income (Elderly) (Welfare)
note- COLA (cost of living adjustment) - gives an automatic wage increase when inflation occurs
Helped by Inflation
1. Borrowers
Unemployment (2-4-16)
Unemployment- the failure to use available resources particularly labor to produce desired goods and services ≠ underemployment
Labor Force
Above 16 years of age
Able and willing to work
Not in the Labor Force
1.Military
2.Mental Institutions
3. Jail or Prison
4. Retired
5. Students
6. Homemakers
7. People who are not looking for a job
Unemployment- 4 to 5% = Full employment or natural rate of unemployment (NRU)
How to calculate unemployment- # of unemployed / # of employed + # of unemployed (Labor Force) x 100
Just a remainder from class activities did you know that the main reason why borrowers benefit from inflation is because the money repaid back has less purchasing power. Great and informative blog Alex.
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