100% noms Unemployment rate = ‘Labour Force Social cost / Loss of Huan resources Not fay wized nnnes oe Resources wasted in tacking socal problems (mes) Inflation Detaton) ‘Apersistent increase (decrease) in gonerel price level 2 Measures of Price Level: 1 Consumer Price Index Consumer goods only (including imported one) 2 components in CPI are fixed fora period (CPIA,CPIB,CPIC) | Weights of th 2 GDP deflator Cover AllFinal consumer and producer goods (except imports) Weights of the components are variable Under inflation, purchasing power of money must drop ro matter the inflation is expected or unexpected \ Under people receiving fixed income wil lose because Unexpected the purchasing power ofthe fixed income drops. Inflation, They receive less in real term Nominal Interest Rate = | Expected Real interest rate + Expected inflation rate Actual Real Interest rate = | Nominal interest rate - Actual inflation rate Cost of holding Money : Nominal interest rate \ Retum of holding Money : | ‘Nominal return = Zero Real return = _— inflation rate Inflation is expected but not fully anticipated For those who receives payment: If their expected inflation rate > actual inflation rate > they actually receive (YOK) than they expect in REAL term > they ABA. Quantity Theory of Money (QTM) MV=PQ =| Velocity of circulation of money is assumed to be constant In LR, Qis constant at Yf, so % change in MS = % change in P In SR, % change in MS = % change in P + % change in Q feEaeT Aliz| Parmule A Nominal MUHEL YAM Prpected) tatlecion vate. + | bxpec eal svilogery vate 6 fama @lnctual| sai ye + Bee hn al situs yale New qytnesy wt hi ae him K& bh » — NHK 18 thro , Actual sublet YON Ark b-4 Lerten ( LM. i sM\ (wee | innit) ® i Kanactesty Rates00 S00 Erpected tattehin vate <4 4 Typed weal tubnect vate > 9 To i cial “atlatiog Yate. = 4 To Wiis Wd actual twtorest yate ( Newenal = Go [ab nowt Change no aacttor epi Actual \ weal tutrese vate 2 f- te 24) Actual Heal wel + warty ~~), Nowsnal whan #f mony = 0) ESET Bepeak. APP yaa } meregene jonttt, Thaw Ue fd? F ww a Ants Ltn pegs vate (4ve b aot, aM qe level) abfatin ~ drcreo in purchasing prwet te MT Me fol) ma ronan, (“Tens ( oe" 44 ]- Dantlaton (ta rite leet / me Sw me). 2 eer Ol 4 ilo “th dlofictin_ > Honiiul Zeer Rate ati at iat Gy Ole ee 4 ietum 'e ini ah = — ye Colarten tt 3 Bat nf vate f 2 © isha Now| 2 nny Cash a (ae) [ 0| Sake On” aoe 4 Po re | rina Helier 4 ° 5 nh Tie ei mo feEaeT Alizpeak: pp yal i hire vale joottl Jhuwnys wees EDP q ws ah Aotsty Annplegiment vate (ve Qo gyotth, an prow Lave) sujatim + decree in purvhasn ee hoe elo) La ene (iutterns a . 447. = Dinflatnn (ta rite leet ho 4 Show pace ). SN Tt dofictin4 dina] out lating rele Th -v- Nowins) vote i > Midi caneof 8 a zy oT 2 Bl aS Uehef Wald-iry cas) = lq] 1 DB Vancns|actbes vane * at in yee tle prt kee feEaeT Aliz -~ww