CPI, Inflation, TVM, Credit Ratings

Question 1

Central banks

Answer 1

• every country has a central bank
• set overnight rates (what everyone else bases their rates on)
• central banks should be kept at arms length of government

Question 2

Inflation

Answer 2

the increase in cost of living as prices of goods and services increase

Question 3

What drives inflation?

Answer 3

-COVID
- demand greater than supply
- oil prices increase due to war. Countries refusing to buy from russia, so supply low, demand high. When prices of energy source goes up, the price of everything goes up

Question 4

CPI

Answer 4

Consumer price index
- measures the rate of inflation

Question 5

How is CPI calculated?

Answer 5

a standardized basket of goods and services (groceries, electricity, gas, power, phones, hotels, etc.). Everything is weighted based on how much is usually consumed.

Keep basket similar year after year, so can tell whether inflation or deflation occurring based on price changes

Question 6

Common CPI vs. Core CPI

Answer 6

Common CPI- the measure of all goods and services

Core CPI- the measure of all goods and services minus food and energy prices. Gets rid of these things because they are highly variable.

Question 7

Trimmed CPI

Answer 7

Excludes 20% of the weighted monthly prices on both the bottom and top of distribution (total of 40% removed)

Question 8

Median CPI

Answer 8

similar to trimmed but it eliminates the outliers on the top and bottom of CPI distribution

Question 9

Inflation indicator by Bank of Canada

Answer 9

BoC tries to keep country within a specific target zone. If goes above, then inflation (high rates).
Will see many tweaks in the rate with inflation (normally only 1-2 per year)

Question 10

How inflation affects us?

Answer 10

If wages increasing faster than the rate of inflation, then there must be a shortage that are pushing them up further

Question 11

Real vs Nominal Rates

Answer 11

Nominal rate- what the investment earns without taking into account inflation

Real rate- what is left of investment after adjusting for inflation. Represents purchasing power

Question 12

Purchasing Power

Answer 12

the value of a currency based on the number of the goods and services that one unit of money can buy

Question 13

Purchasing Power over time

Answer 13

Purchasing power could weaken over time if interest rates are increasing. Money is worth the most TODAY.

Most of the time unless under deflation, nominal rate will be higher than real return

Question 14

Why is it essential to increase vet products and services?

Answer 14

Essential due to inflation. Need to take into account the real return.

Question 15

Real Return and Salaries

Answer 15

Make sure you take into account the real return when deciding on a salary/salary increase. If they offer you a 4% increase, but inflation is 2%, then only getting a 2% increase.

Question 16

Time Value of money (TVM)

Answer 16

concept that money available in the present is worth more (greater purchasing power) than the exact same amount in the future

Question 17

Future Value of Money (FV)

Answer 17

FV= PV x 1+ (i/n)

Use present value, future value, n= compounding periods, and t=time in years

Question 18

Simple vs. compound interest

Answer 18

Simple- based on principal amount of a loan or deposit

Compound- based on principle amount and the interest that assumulates

Question 19

Rule of 72

Answer 19

Determines how long it will takes to double your investment

72 divided by rate=

Question 20

Credit ratings

Answer 20

• used to evaluate whether you are a risk for a bank
• lower the score= higher the risk

Question 21

What factors influence credit score?

Answer 21

• credit scores, line of credit, loans, mortgages
• history of payments
• how much credit you have, and how much you have used
  -how long you have had credit accounts
• any bankruptcies
• checking credit scores can lower score