Price indices and Inflation & cost of Inflation

Question 1

What is the goal with regards to inflaton

Answer 1

keep prices stable, not increase inflation

Question 2

Who and how is inflation measured

Answer 2

1. the gov tracks the prices of specific market baskets
2. market baskets include he same goods and services
3. Gov. tracks the change in the basket price over time

Question 3

What are the two ways to look at inflation

Answer 3

1. The inflation rate
2. Price indices or index

Question 4

What is the inflation rate

Answer 4

the % change in prices over a specific time period

Question 5

What is priceindices or index

Answer 5

index numbers assigned to each year that show how prices have changed relative to a specific base year
- not a %
- each base year is given an index of 100
- each year is given an index # as well

Question 6

What is the most commonly used measurement of inflation

Answer 6

price indices or index

Question 7

What is an important note about inflation, is it ok for prices to go up over time?

Answer 7

prices can go up over time, we just don’e want spikes in inflation or even lower prices or deflation

Question 8

What is the formula for CPI

Answer 8

CPI = (price of market basket) / Price of market basket in base year) x 100

Question 9

What is disinflation

Answer 9

when prices go up, just not as fast

Question 10

what is inflation

Answer 10

prices are going up

Question 11

what is deflation

Answer 11

prices are going down

Question 12

Ex. Liam was paid $500 by the gov for unemployment benefits. Does it count toward GDP?

Answer 12

no, b/c it’s a transfer payment

Question 13

ex. Harry lives in Quebec but paid $35 k for out of province tuition. Does it count toward GDP?

Answer 13

yes, education is a service

Question 14

ex. Joe’s recording studio paid $50k for new musical instruments. Does it count toward GDP?

Answer 14

yes, but it’s investment not consumer spending

Question 15

Ex. Larry purchased $10k worth of gov. treasury bills. Does it count toward GDP?

Answer 15

no, its a non-production. nothing was created

Question 16

ex. Neil purchased a new roof for 3 million home he purchased 5 years ago Does it count toward GDP?

Answer 16

yes, considered investment

Question 17

Practice Question:

                                            # of people  Full time workers                   150 Part-time workers                   20 unemployed                             30 Discouraged workers             50 # of children                            50
                                            --------- Total population                     300

How many workers are in the labour force

Answer 17

150 + 20 + 30 = 200

Question 18

Practice Question:

                                            # of people  Full time workers                   150 Part-time workers                   20 unemployed                             30 Discouraged workers             50
                                            --------- Total population                     300

Calculate the labour force participation rate:

What is the unemployment rate

Answer 18

200 / 250 = 80%

Add details where the numbers came from

in labour force = 200 / (# in labour force + discouraged workers?) 250

30 / 200 = 15%

Question 19

What type of employment do we have when the economy is inside the demand curve

Answer 19

all 3 unemployments are involved

Question 20

What type of employment do we have when the economy is on the demand curve

Answer 20

Frictional and structural = at fully employment

Question 21

What type of employment do we have when the economy is outside the demand curve

Answer 21

Economy can produce beyond full employment with very little structural and frictional unemployment

• not really possible, not the goal

Question 22

If you have an economy outside the demand curve what can you say about employment and inflation

Answer 22

• beyond full employment, will cause higher inflation eventually

Question 23

What happens when you pay people when they are unemployed

Answer 23

increases frictional unemployment as people take longer to find jobs

Question 24

What is the issue with CPI

Answer 24

sometimes it over or under estimates what’s going on

Question 25

What is substitution Bias

Answer 25

when CPI falls to account for consumers switching to cheaper alternatives as prices change

Question 26

What does substitution Bias lead to

Answer 26

leads to overestimation of the cost of living

Ex. Price of beef goes up
- many assume people are still buying beef at the higher price but they switched to chicken

Question 27

What the problems with unintended inflation (who is helped and hurt by unintended inflation)

People hurt by it:

Answer 27

Hurt:
1. lenders that lend at a fixed interest rate
2. people with fixed incomes like retirees - erodes their purchasing power

Question 28

What the problems with unintended inflation (who is helped and hurt by unintended inflation)

People who benefit by it:

Answer 28

Benefit:
1. borrowers that borrow at a fixed interest rate
- you are paying back those dollars with a lower purchasing power