prompted many unions in the 1970s to insist upon labor contracts which incorporated cost- of-living adjustment clauses to automatically adjust workers’ incomes of inflation. Similarly, the redistribution of income from lender to borrower which we just observed might be al­tered if inflation is anticipated. Suppose that a lender (perhaps a commercial bank or a sav­ings and loan) and a borrower (a household) both agree that 5 percent is a fair rate of interest on a one-year loan, provided the price level is stable. But assume inflation has been occur­ring and both lender and borrower agree it is reasonable to anticipate a 6 percent increase in the price level over the next year. If the bank lends the household S100 at 5 percent, the bank will be paid back $ 105 at the end of the year. But if 6 percent inflation does occur during the year, the purchasing power of that $105 will have been reduced to about $99. The lender will in effect have paid the borrower $1 to use the lender’s money for a year.

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The lender can avoid the curious subsidy by simply increasing the interest rate by the amount of the anticipated inflation. Specifically, by charging 11 percent the lender will receive back $ 111 at the end of the year which, adjusted for the 6 percent inflation, has the real value or purchasing power of about $105. In this instance there is a mutually agreeable transfer of purchasing power from borrower to lender of $5, or 5 percent, for the use of $100 for one year. It is relevant to note that savings and loan institutions have developed variable-interest-rate mortgages to protect themselves from the adverse effects of inflation. Incidentally, these examples imply that, rather than being a cause of inflation, high nominal interest rates may be a consequence of inflation.

Our illustration points out the difference between the real rate of interest, on the one hand, and the money or nominal rate of interest, on the other. The real interest rate is the percentage increase in purchasing power that the lender receives from the borrower. In our example the real interest rate is 5 percent. The nominal interest rate is the percentage increase in money that the lender receives. The nominal rate of interest is 11 percent in our example. The difference in these two concepts is that the real interest rate is adjusted or ‘deflated’ for the rate of inflation while the nominal interest rate is not.

Exercise 10.

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Деякі економісти побоюються, що помірна, повзуча інфляція, яка спочатку може супроводжувати пожвавлення економіки, потім, зростаючи як снігова куля, перетво­риться на більш жорстоку гіперінфляцію. Цей термін позначає надмірно швидкі темпи росту інфляції, яка чинить руйнівний вплив на обсяг національного виробництва та зайнятість. Справа в тім, що, коли ціни повільно, проте постійно зростають, населен­ня та підприємства готуються до їхнього подальшого зростання. Тому, щоб їхні неза- стосовані заощадження та теперішні доходи не знецінилися, тобто щоб визначити пе­редбачуване підвищення цін, люди повинні ‘витрачати гроші зараз’. Підприємства по­водяться так само, купуючи інвестиційні товари. Вчинки, продиктовані ‘інфляційним психозом’, посилюють тиск на ціни, і інфляція починає ‘годувати сама себе’. Більш того, оскільки вартість життя зростає, робітники вимагають та отримують більш висо­

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