Mod 14-15 Flashcards
real wage =
wage rate / price level
:to adjust for inflation or deflation effects
real income
income/ price level
:to adjust for effects of inflation or deflation
Inflation rate =
[(price level in yr 2 - price level in yr1) / price level in yr 1] X 100
Inflation
increase in the general price level that causes the real value of money to decrease: the dollar is worth less
“real”
adjusted for inflation
“nominal”
not adjusted for inflation
Shoe-leather costs
increased costs of transactions caused by inflation
-high inflation: don’t save money! purchasing power decreased
-shoes get worn out from running to banks to move around money
menu costs
real costs of changing list prices
-workers spend time assigning new price stickers and updating computer systems
Unit of Account costs
come from inflation making money a less reliable unit of measurement
phantom gains
money that is lost to inflation but taxed anyway because appears to be a profit
interest rate
- a fixed interest rate is created based off of expected inflation
:percentage of loan amount that the borrower must pay to lender in addition to loaned amount
nominal interest rate
interest rate ACTUALLY paid for loan
real interest rate =
interest rate - rate of inflation
who is helped by inflation?
borrowers: inflation decreases the real value of what to pay back on their loans
Who are hurt by inflation?
lenders, savers, and people with fixed income: the value of the money they are getting/ have is decreasing
disinflation
process of bringing down the inflation rate
aggregate price level
measure of the overall level of prices in an economy
The price level compares the price of the market basket of goods in a given year to its price in the base year.
price index
avg. price change: track changes in a consumer’s price bundle
market basket
a hypothetical set of consumer purchases of good and services calculated relative to base year
price index
measures the cost of purchasing a given market basket in a given year. The index value always equal to 100 in the base year
Price index in a given year =
(cost of market basket in a given year / cost of market basket in base year) X 100
in the base year prices …….
are 100% of what they are in the base year so CPI in base year is always 100
Consumer Price Index
measures the cost of the market basket of a typical American family (logarithmic scale) surveys 23000 retail outlets in 87 cities
Substitution Bias
occurs in the CPI because overtime items with prices that have risen most receive too much weight (b/c households substitute away from them) while items with prices that have risen least are given too little weight ( b/c households shift their spending toward them)
3 Causes:
1. Consumers alter spending
2. new items
3.product improvements
Producer Price Index
“early warning signal” b/c energy is raised first
:measures the price of goods and services purchased by consumers
GDP Deflator =
(nominal GDP / real GDP ) X 100
*ignores input prices
What happened to the economy during the Great Depression?
Deflation
What happened to the economy during WWII?
Inflation
Circular Flow in the context of inflation
prices paid to firms for goods and services –> paid more money revenue increases.
1. wages or rent increases
OR
2. profits increase –> dividends go back to the people
Nominal Interest rate (rate ACTUALLY paid) =
real interest rate (actual return) + expected inflation rate
Who are the biggest lenders?
Householders!
they put their money in bank accounts!
Who gets money in inflation
the government gets money while the value of our money decreases
5 categories of unemployment
- structural unemployment: out of work b/c location and bad structure of economy
- seasonally unemployed: in the off-season
- cyclically unemployed: recession
- frictionally unemployed: rentering, graduate, quit job
- part time: ur still fully counted as employed
- NOT COUNTED: discouraged workers: hidden unemployed
inflation
- misallocation of resources due to rising price level
- erodes value of financial assets
