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
