1. Module 14 Mar 2015

2.  Real Wage – the wage rate divided by the price level  Real Income – is income divided by the price level  Inflation – A given amount of money buys less  Inflation rate – the percent change per year in a price index – typically the consumer price index

3.  Price level in year 2 – price level in year 1 x 100  Price level in year 1

4.  Shoe-leather costs – the increased costs of transactions caused by inflation – ex. Germany 1921 shop keepers brought their money to the bank several times a day to exchange it for foreign currency (because the reichmark was unstable) this had a cost of time and labor  Menu costs – the real costs of changing listed prices – imagine the cost of labor involved changing all the prices at the new Haggen’s  Unit-of-account costs – arise from the way inflation makes money a less reliable unit of measurement – in olden times, people placed a unit of value on such things as cattle – so a person’s rent could be 2 cattle per year.

5.  Nominal Interest Rate – the interest rate actually paid for a loan  Real Interest Rate – the nominal interest rate minus the rate of inflation  Disinflation – the process of bringing the inflation rate down – happens with recessions/depressions