Interest rates and inflation can impact economies and markets in several ways. Simple interest is calculated as principal times rate times time, while compound interest grows exponentially. Bubbles can form when interest rates are low for extended periods, as seen with housing in the late 2000s. Stagflation involves high inflation combined with economic stagnation, which occurred in the 1970s due to oil shocks. Central banks aim to control inflation through interest rate policies and may target specific inflation ranges to stabilize economies.

1. Interest Rates&Inflation

2. Interest Rates

3. What is interest? Interest is a fee charged on money that is borrowed The interest rate is a percentage of money that the lender wants to gain from the investment Interest is usually calculated annually The calculations involve the money borrowed, the interest rate, and the length the money is borrowed for

4. Types of interest There are 4 main types of interest rate: Simple Interest Compound interest Fixed term interest Variable term interest

5. Simple Interest Most basic type of interest The formula for calculating simple interest is I=P*R*T I- Interest P- Principle R- Rate T- Time

6. Example of Simple Interest If TD is offering a 5% return on investment, for a 3 year term, what would be the interest collect at the end of the term if $10,000 is invested? $10,000*5%/100*3=I I=$1500

7. Compound Interest Grow at a exponential rate A=P(1+R/N)^NT A- Amount at the end of investment P- Principal amount R- annual interest rate N- Number of time the interest is compounded per year T- Time( number of years)

8. Fixed term Interest Fixed term interest has a constant interest rate which does not change A Fixed term interest rate would not be affected by any economical events such as inflation Usually Fixed term interest are used in mortgages

9. Variable Term Interest The interest rate will vary during term Considered as a low risk investment Credit cards are mostly based on variable interest The rate of interest during the term is based on inflation and other economical events

11. Video http://www.youtube.com/watch?v=qmBplVSjUcM

12. What types of inflation do you believe is the most effective in this economy?

13. Article.Topic: Current concerns Reuters:“Bank of Canada sees rebound modest versus past ones.” http://www.reuters.com/article/bondsNews/idUSN2515976720091025

14. Article Canada’s economic recovery is under way, more modest than historical norm CAD$ inflation is a target key factor in setting policy Canadian corporate balance sheets are strong

15. Bubbles Caused by Interest Rates

16. What is bubbling Bubbling is a situation where market prices are unsustainably high. bubbling is when the quantity is low and the demand is high. Bubble is not a good thing to have

17. Examples of bubbling Housing market (2007) Tulip mania (1637) Railway Mania (1840) Sports cards and comic books (1980- 1990)

19. Dozens of mortgage firms, tens of thousands of jobs on Wall Street and the dreams of about 1 million proud new homeowners who lost their houses

21. In what way do you believe that Canada`s current housing bubble can be deflated without major losses on the part of the Canadian public?

22. Stagflation

25. Stagflation Stagnation + Inflation = Stagflation A period where the economy is very slow + The continuous price increases = Unfavorable economic condition Economy is slowed by unfavorable shock Ex: Increase of price in oil in oil importing country Can also result from inappropriate macroeconomic policies Inflation = excessive growth of money supply Stagnation = excessive regulation of goods markets and labor markets.

26. Stagflation in 1970s Stagflation appeared in 1970s Horrible chain of events consumers expected continuous increases in prices resulting in heavy spending Increase in demand, increased the prices Increased prices lead to demand of higher wages Demand of higher wages, pushed prices even higher Never-ending upward spiral

28. 1970s cont… Attempt of government to keep track of payments such as Social Security and Consumer Price Index Helped workers to fight with inflation for a while With passage of time, government required more funds and thus needed to borrow = even higher interest rates

29. Stagflation 1970s- Solution President Jimmy Carter (1977-1981) took some desperate steps. Increased government spending Voluntary wage Price guidelines Plan did not work 1980s, the government of United States loosened the controls on bank interest rates. Country forced through several years in recession

30. Cause of Stagflation (1970) OPEC oil crisis Organization of Petroleum Exporting Countries decided to raise the prices of oil dramatically and cut back on supply Proved as major shock sending economy into period of stagflation In Canada, inflation climbed to over 10% in 1974 and 1975 Unemployment increased to 7% by 1975

31. Discussion Question- Stagflation What measures can the government take in order to keep Stagflation from occurring again?

32. Auction for Survival

33. HYPERINFLATION

36. Monetary and fiscal authorities of a federal government issues large quantities of money to pay for projects

38. High inflation encourages families to sustain higher wealth in items rather than cash to avoid inflation tax

39. But as people buy more, the prices continue to inflate

40. On July 18, 2008, it cost 150 billion ZW$ to buy 3 eggsChart Showing Quickly Inflating ZW$

42. Hyperinflation worsened as they attempted to print more money to pay off debt

45. Forecasted 2.5% inflation rate for 2011 in America, 0.5-0.8% higher than preferred range of central bank

46. Refusal to raise interest rates due to high unemployment rate will cause debt and inevitably, inflation

48. Central Banks & Inflation Targeting

49. Central Banks Responsible for creating a stable financial environment Each country has their own

50. Central Banks Interest Rates Bank can buy or sell government securities to the private sector to reinforce the interest rate Providing liquidity to banks on a day-to-day basis

51. Inflation Targeting A process by which the inflation is held within a published range. Transparency is necessary Without targeting With targeting

52. Inflation Targeting 2% 1% - 3%

53. Inflation Targeting Based on Consumer Price Index. Pros: It stabilizes the entire economy. Investors Average Families No guessing involved. Cons: Other monetary policies are not adhered to, such as full employment, and avoiding a recession. Central bank can become too weak and inflexible to react to huge shocks, such as a sudden recession

54. Target Inflation Current Inflation $ Interest Rates

55. Current Inflation Target Inflation $ Interest Rates

56. Do you think that inflation targeting should be a major priority of the Bank of Canada?

57. The End