Work through the list without notes. If you cannot do a statement, follow its link, then come back. Guide = study guide; Practice = practice questions.
Understanding
- I can explain the difference between expected and unexpected inflation. (Guide: “Expected and unexpected inflation”; Practice Q4)
- I can explain why contracts fixed in money terms allow unexpected inflation to move purchasing power from one group to another. (Guide: “Expected and unexpected inflation”)
- I can explain why fully expected inflation does not redistribute wealth between a lender and a borrower. (Guide: “What if the inflation had been expected?”; Practice Q4)
Calculation
- I can calculate what a fixed loan repayment is worth in start-of-year money after inflation or deflation. (Guide: Worked example 1; Practice Q3, Q6(b)–(c))
- I can calculate the real value of a fixed wage or pension and the percentage change in purchasing power. (Guide: Worked example 2; Practice Q5, Q7(a))
- I can calculate the indexed payment that keeps purchasing power constant. (Guide: Worked example 2(d); Practice Q5(c), Q7(b))
Reasoning
- I can identify who gains and who loses from unexpected inflation: lenders, borrowers, savers, pensioners, workers and employers. (Guide: “Other winners and losers”; Practice Q1, Q5(d))
- I can explain how unexpected deflation reverses these effects and raises the real burden of debt. (Guide: “Lenders and borrowers”; Practice Q2, Q6(c))
- I can explain why the redistribution is called arbitrary. (Practice Q6(d))
- I can explain at least one cost that unexpected inflation imposes on the whole economy, such as less long-term lending. (Guide: “Costs to the economy as a whole”; Practice Q7(c))
All ticked? Move on to Topic 2.6, Real v. Nominal GDP, or return to the course roadmap.