ECON 1040 Lecture Notes - Lecture 5: Real Wages, Money Illusion, Real Change
Document Summary
Fall in the price level: why is this problematic, uncertainty about price changes. In order to keep track of these price drops. Lenders fear lending out money today and getting less-valuable dollars back next year. If prices and wages all go up by 2%, there is no real change in purchasing power. People with money illusion think they are richer in this case: ex: suppose nominal wages increase by 3% and prices go up by 5%. If unexpected inflation occurs: you are better off, bank is worse off, the (cid:271)a(cid:374)k (cid:449)ould ha(cid:448)e (cid:396)e(cid:395)ui(cid:396)ed (cid:373)o(cid:396)e i(cid:374) (cid:396)etu(cid:396)(cid:374) fo(cid:396) the loa(cid:374) (i. e. , you"d. If the inflation was expected have to repay ,000 in five years) In 1924, you could buy a fully constructed house for ,969: to compare prices over time, we can transform past prices into a price in today"s dolla(cid:396)s you use this .
