5-3. Macroeconomics Flashcards
What does changing prices by themselves create?
Changes in measures of economic activity and outcomes.
What does price index do?
Neutralize the effects of changing prices for economic purposes.
will convert the prices in multiple periods to what they would have been on a single base period.
What is the percentage of base period?
100%. Each period measured as percent of base period.
Who prepares most US indexes?
Bureau of Labor Statistics (BLS).
What is CPI and what does it do?
Consumer Price Index.
Relates price of a basket of goods and services during a period to price of the basket of consumer goods and services in a prior base period.
What is the most common CPI?
CPI-U = consumer price index for all urban (U) consumers.
What is the base period for CPI-U?
Average prices for 36-month period 1982 through 1984.
CPI-U example:
1982-84 base = 100%. 2013 = 233.049%. 2014 = 234.812%. What does it mean?
2013 prices were 133.049% higher than the average price in the base period.
2013 prices were 134.812% higher than….
What can the rate of change in CPI-U measure?
Ex:
2013 CPI-U = 233.049%. 2014 = 234.812.
Rate of inflation/deflation.
2013-2014 change = 234.812-233.049=1.763
1.763 / 233.049 (base year) = 0.756% (rate of change) = 2014 inflation rate.
What is Producer Price Index (PPI)?
Measures the average change over time in the selling prices received (revenue received) by domestic products for their output.
(Measured by the revenue/selling price received by the first commercial transaction of producers for their domestically produced goods, services, and construction output)
What is the difference between CPI-U and PPI?
PPI includes a greater set of goods and services than the CPI-U, spanning the entire range of output by US producers.
PPI: how is computed? What does result measure? Where is the change in PPI trickle down to?
The same as CPI-U.
Measures inflation/deflation at the producer level rather than consumer level.
To consumer level.
What is PPI primarily used for?
To deflate revenue streams in order to measure real growth in output.
What is GDP deflator?
Gross domestic product deflator. Relates nominal GDP to real GDP. *Attempts to include all spending in GDP *More comprehensive than CPI-U or PPI *Composition of "basket" changes more frequently than CPI or PPI
How is GDP deflator computed?
(Nominal GDP / Real GDP) x 100
What is inflation? Deflation?
Inflation: Rate of increase in the price level
Deflation: Rate of decrease in the price level
What are 2 fundamental causes of inflation?
- Demand induced (demand-pull) inflation: Aggregate spending for goods/services exceeds productive capacity of the economy at full employment.
- Supply induced (cost-push) inflation: Increases in the cost of inputs result in higher prices passed on to end user.
What are consequences of inflation?
- Lower current wealth and real income, resulting in reduced aggregate demand
- Higher interest rates as lender seek to keep up with inflation, resulting in reduced investment in capital goods
- Generally leads to uncertainty in the economy, resulting in postponed economic commitment
What is the primary target of fiscal/monetary target?
Inflation.
Inflation example:
Lender borrowed $1,000 with interest rate of 3%. Inflation occurred and prices rose by 2%. Lender paid back $1,030 (principal + interest). What is the amount worth in real terms (after inflation)?
1,030 - (1030x2%) = 1,009.80
How is GDP in terms of base period dollars computed?
Nominal GDP / Price index increase amount
What are 3 functions of money?
- Medium of exchange: Common means of pmt in exchange for goods/services
- Measure of value: Common denominator for assigning value and measuring economic activity
- Store of value: Retains value over time to be used in the future
Who controls the money supply in US?
Federal Reserve System (Fed)
What are 3 measures of money Fed provide?
M1, M2, M3
What is M1? What is based on? Examples?
Narrowest definition (measure) of money.
Based on instruments used for transactions.
*Paper and coin currency held outside banks
*Check-writing deposits in banks - funds that can be accessed using checks
What is M2?
Includes all items in M1 plus;
- Saving deposits
- Money-market deposits
- Certificates of deposit less than $100,000
- Individual-owned money-market mutual funds
What is M3?
Includes all items in M2 plus;
- Certificates of deposits greater than $100,000
- Instituional-owned money-market mutual funds
Federal Reserve System: What is Board of Governors?
7 member policy making body, including a chairman.
Federal Reserve System: What is Fed-open-market committee?
12 member body responsible for implementing monetary policy to effect money supply through open-market operations.
Federal Reserve System: What is Federal Reserve Banks?
12 district banks each responsible for a geographical area. Owned by member institutions, including; *Commercial banks *Savings and loan associations *Mutual saving banks *Credit unions
Federal Reserve System: Who do individuals and businesses deal with?
With member institutions, not directly with the Federal Reserve Banks
What is Monetary Policy?
Managing the money supply to achieve national economic objectives, including;
- Economic growth
- Price level stability
Who exercises monetary policy? How?
Fed through;
- Reserve requirement
- Open market operations
- Discount rate
What is Fed reserve requirement? Ex: if 10% reserve requirement and $100 loan?
Percent of loans made by banks that must be held in reserve.
$10 must be held in reserve for every $100 in loans
What happens when reserve requirement is increased?
Decreases loans and money supply.
What is Fed open market operations?
Fed buying and selling US Treasury debt with member banks.
Fed open market operations: What happens when Fed buys US treasury debt from member banks? If it sells?
Increases funds available to banks for loans (money supply).
Decreases funds.
What is Fed Discount rate? What is the impact on borrowing and money supply?
Interest rate member banks pay when borrowing from Fed.
- Increase discount rate = Reduce borrowing and money supply (banks charges more to customers - reduce borrowing).
- Decrease = opposite.
Money supply and interest rate: what is Y and X-axis? What does demand curve look like?
Y: Interest rate
X: Money supply
Negative slope.
What are 2 types of policy? Which one is primarily used to impact economy by government? Why?
Fiscal and monetary.
Monetary: quick, less political influence
What are government action for fiscal and monetary action?
Fiscal: Increase/decrease government spending.
Fiscal: Increase/decrease tax
Monetary: Increase/decrease money supply
What is the velocity of money? How is it computed?
A measure of the average frequency with which a dollar is exchanged for goods and services during a period.
Nominal GDP / Money supply
