2/14 lecture Flashcards
how to you convert nominal to real GDP
through GDP deflator
do things get more expensive in nominal or real form
nominal
price level theory is
a hypothetical number representing an economy’s overall level of nominal forces at a particular point in time
price index is
the nominal price of an actual basket of goods and servives at a particular point in time
example of price index is
GDP delfator
price index serves as a practivally viable measuer of the
price level
while the price level is interesting we are more interested in how
levels change over the course of time
inflation
growth of price level
hyperinflation
high rates of inflation (fast increase in price levels)
disinflation
a decrease in rate of inflation
deflation
negative growth of price level (negative rate)
stagflation
joint observation of high inflation and high unemplyment
when did deflation occur historically
great depression and great recession
what are weights
The weights are meant to reflect the relative importance of the goods and services as measured by their shares in the total consumption of households. The weight attached to each good or service determines the impact that its price change will have on the overall index.
what are the four measures of inflation
HH: CPI vs PCE
Firms: PPI vs GDPD
what is CPI (consumer price index)
the price of a weighted average market basket of consumer goods and services purchased by households.
what is PCE (personal consumption expenditure index)
consumer centric weights that are updated annually
measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends.
what is producer price index
include intermediate inputs
A producer price index is a price index that measures the average changes in prices received by domestic producers for their output.
what is GDP deflator
measures the changes in prices for all of the goods and services produced in an economy.
why is it a bad idea ot find real growth with CPI
because you need to look at furms
what does real growth capture
change in price
what does nominal GDP account for
change in price and quantities
what do many people argue about infaltion
that it represents a silent tax or theft (a lot of negativity around infaltion)
monetarist view on inflation
inflation is always and everywhere a monetary phenomenon (fed is responsible)
fiscal view on inflation
executive deficits can lead to deterioration (treasury is responsible)
what are the two reasons for regulation around inflation
real and banking
real for inflation is
cash, banks deposits (can be sed by HH, F)
banking for inflation is
vault cash, reserves (cannot be used by HH or firms)
what is the federal reserve
the central bank responsible for managing the currency and monetary policy in the US
what does the fed want to do
keep prices stable
what is the dual mandate
promote goals of max employment, stable oprices, and moderate long term interest rates
what inflation rate does the FED aim for
2% over the long run
what are the cons of inflation
less purchasing power and makes planning difficult
pros of inflation
avoid recession which is why we aim for positive inflation. want buffer between deflation
why is recession bad
fall in prices, money gains purchasing power, but by sitting on money it gains value so people are spending less money and point of money is to spend it. so during recession money loses its function
after the great inflation who brought prices back down
paul Volcker (Volcker disinflation)
price index is
a practical measure of the previous level of prices
