Macro Economics Chapter 07 Power Point

Question 2

What will I study in chapter 7?

Answer 2

•How the government measures the price level•How it computes the rate of inflation•The consequences and causes of inflation

Question 3

What is inflation?

Answer 3

•An increase in the general (average) price level of goods and services in the economy

Question 4

What is deflation?

Answer 4

•A decrease in the general (average) price level of goods and services in the economy

Question 5

What is the most widely reported measure of inflation?

Answer 5

•The Consumer Price Index (CPI)

Question 6

What is the Consumer Price Index?

Answer 6

•It measures changes in the average prices of consumer goods and services

Question 7

Who reports the CPI?

Answer 7

•The Bureau of Labor Statistics (BLS) of the Department of Labor

Question 8

How is the CPI calculated?

Answer 8

•“Price collectors” contact retail stores, homeowners, and tenants in selected cities in the U.S. monthly

Question 9

Which goods and services are included in the CPI?

Answer 9

•The BLS records average prices for a “market basket” of different items purchased by the typical urban family

Question 10

What is the Composition of the CPI?

Answer 10

Food 13%Housing 33%Apparel 4%Transportation 18%Health Care 6%Entertainment 5%Education & communication 2%All other goods & services 19%

Question 11

Does the makeup of the CPI change?

Answer 11

•As people’s tastes and preferences change, some of the goods and services that go into the basket change

Question 12

How is the CPI computed?

Answer 12

•Current year prices are compared to prices of a similar basket of goods and services in a base year

Question 13

What is a base year?

Answer 13

•A year chosen as a reference point for comparison with some earlier or later year

Question 14

CYP = cost of the market basket of products at current-year pricesBYP = cost of the market basket of products at base-year prices

Answer 14

CPI= CYP/BYP X 100

Question 15

Why is the CPI always 100 in the base year?

Answer 15

•The numerator and the denominator of the CPI formula are the same in the base year

Question 16

How is the inflation rate computed?

Answer 16

•By measuring the percentage change in the official CPI from one year to the next

Question 17

ARI = Annual rate of inflationCPIY = Consumer price index in given year*CPIPY = Consumer price index in previous year

Answer 17

ARI = CPIY - CPIPY/CPIPY X 100

Question 18

What is disinflation?

Answer 18

•A reduction in the rate of inflation

Question 19

What are some criticisms of the CPI?

Answer 19

•It can overstate or understate for certain groups•Does not measure quality•Substitutes are ignored

Question 20

What does inflation do to people’s income?

Answer 20

•A general rise in prices will shrink people’s income

Question 21

What is nominal income?

Answer 21

•The actual number of dollars received over a period of time

Question 22

What is real income?

Answer 22

What is real income?

Question 23

RI = Real incomeNI = Nominal income*CPI = CPI as a decimal or CPI ÷ 100

Answer 23

RI = NI/CPI

Question 24

What is wealth?

Answer 24

•The value of the stock of assets owned at some point in time

Question 25

How is wealth affected by inflation?

Answer 25

•Inflation can benefit holders of wealth because the value of their assets tends to increase as prices rise

Question 26

What will cause your real income to decline?

Answer 26

•The rate of inflation is greater than your rate of income

Question 27

What is the interest rate?

Answer 27

•Interest per year as a percentage of the amount loaned or lent

Question 28

What is the nominal interest rate?

Answer 28

•The actual rate of interest earned over a period of time

Question 29

What is the real interest rate?

Answer 29

•The nominal rate of interest minus the inflation rate

Question 30

How does inflation affect borrowers and savers?

Answer 30

•They can win or lose depending on the rate of inflation and interest

Question 31

What are the two basic types of inflation?

Answer 31

•Demand-pull•Cost-push

Question 32

What is demand-pull inflation?

Answer 32

•A rise in the general price level resulting from an excess of total spending (demand)

Question 33

When does demand-pull inflation occur?

Answer 33

•When the economy is operating at or near full employment

Question 34

What is cost-push inflation?

Answer 34

•A rise in the general price level resulting from an increase in the cost of production

Question 35

What can cause cost-push inflation?

Answer 35

•Cost increases for labor, raw materials, construction, equipment, borrowing etc.

Question 36

Do people’s expectations affect inflation?

Answer 36

•Yes, expectations can influence both demand-pull and cost-push inflation

Question 37

How does the U.S. inflation rate compare with other countries?

Answer 37

•It is lower than some and higher than others

Question 38

What is hyperinflation?

Answer 38

•An extremely rapid rise in the general price level

Question 39

What is a wage-price spiral?

Answer 39

•Increases in nominal wage rates are passed on in higher prices, which, in turn, result in even higher nominal wages and prices