Macro Economics Chapter 07 Power Point Flashcards
What will I study in chapter 7?
•How the government measures the price level•How it computes the rate of inflation•The consequences and causes of inflation
What is inflation?
•An increase in the general (average) price level of goods and services in the economy
What is deflation?
•A decrease in the general (average) price level of goods and services in the economy
What is the most widely reported measure of inflation?
•The Consumer Price Index (CPI)
What is the Consumer Price Index?
•It measures changes in the average prices of consumer goods and services
Who reports the CPI?
•The Bureau of Labor Statistics (BLS) of the Department of Labor
How is the CPI calculated?
•“Price collectors” contact retail stores, homeowners, and tenants in selected cities in the U.S. monthly
Which goods and services are included in the CPI?
•The BLS records average prices for a “market basket” of different items purchased by the typical urban family
What is the Composition of the CPI?
Food 13%Housing 33%Apparel 4%Transportation 18%Health Care 6%Entertainment 5%Education & communication 2%All other goods & services 19%
Does the makeup of the CPI change?
•As people’s tastes and preferences change, some of the goods and services that go into the basket change
How is the CPI computed?
•Current year prices are compared to prices of a similar basket of goods and services in a base year
What is a base year?
•A year chosen as a reference point for comparison with some earlier or later year
CYP = cost of the market basket of products at current-year pricesBYP = cost of the market basket of products at base-year prices
CPI= CYP/BYP X 100
Why is the CPI always 100 in the base year?
•The numerator and the denominator of the CPI formula are the same in the base year
How is the inflation rate computed?
•By measuring the percentage change in the official CPI from one year to the next
ARI = Annual rate of inflationCPIY = Consumer price index in given year*CPIPY = Consumer price index in previous year
ARI = CPIY - CPIPY/CPIPY X 100
What is disinflation?
•A reduction in the rate of inflation
What are some criticisms of the CPI?
•It can overstate or understate for certain groups•Does not measure quality•Substitutes are ignored
What does inflation do to people’s income?
•A general rise in prices will shrink people’s income
What is nominal income?
•The actual number of dollars received over a period of time
What is real income?
What is real income?
RI = Real incomeNI = Nominal income*CPI = CPI as a decimal or CPI ÷ 100
RI = NI/CPI
What is wealth?
•The value of the stock of assets owned at some point in time
How is wealth affected by inflation?
•Inflation can benefit holders of wealth because the value of their assets tends to increase as prices rise
What will cause your real income to decline?
•The rate of inflation is greater than your rate of income
What is the interest rate?
•Interest per year as a percentage of the amount loaned or lent
What is the nominal interest rate?
•The actual rate of interest earned over a period of time
What is the real interest rate?
•The nominal rate of interest minus the inflation rate
How does inflation affect borrowers and savers?
•They can win or lose depending on the rate of inflation and interest
What are the two basic types of inflation?
•Demand-pull•Cost-push
What is demand-pull inflation?
•A rise in the general price level resulting from an excess of total spending (demand)
When does demand-pull inflation occur?
•When the economy is operating at or near full employment
What is cost-push inflation?
•A rise in the general price level resulting from an increase in the cost of production
What can cause cost-push inflation?
•Cost increases for labor, raw materials, construction, equipment, borrowing etc.
Do people’s expectations affect inflation?
•Yes, expectations can influence both demand-pull and cost-push inflation
How does the U.S. inflation rate compare with other countries?
•It is lower than some and higher than others
What is hyperinflation?
•An extremely rapid rise in the general price level
What is a wage-price spiral?
•Increases in nominal wage rates are passed on in higher prices, which, in turn, result in even higher nominal wages and prices
