unit 2 test Flashcards
CPI
Consumer Price Index
price of market basket/price of base year market basket X 100
Inflation rate
Recent year - Old year/Old year X 100
Real GDP
Base price X current quantity
OR
Nominal GDP X 100/GDP Deflator
GDP Deflator
Nominal GDP/Real GDP X 100
Nominal GDP
Deflator X Real GDP/100
Real Income
Nominal Income/Price Index (hundredths)
Real Interest Rate
nominal interest rate - inflation rate
Price Change
Change in CPI/Beginning of CPI X 100
Real GDP per capita
Real GDP/population
Inflation
an increase in the economy’s price level (weighted average)
leads to decreasing in money purchasing power
two types of inflation
demand pull
cost push
demand pull
too much money chasing little goods
creates overheated economy with excess spending and the same amount of goods
cost push
major cause is a supply shock
creates negative supply shock = price rise and quantity falls
three names for cost push
stagflation, negative supply shock, cost push
CPI definition
used to measure consumer inflation
market basket approach - more than 300 goods typically purchased by urban customer
CPI weakness
ignores substitution, quality changes, new products
PPI definition
measures the cost of a typical basket of goods and services
raw commoditites
PPI shows inflation quicker than CPI
unemployment rate formula
of unemployed/labor force X 100
labor force formula
labor force/population 16 and older X 100
Who wins in inflation
those with large debts
borrowers at a fixed interest rate
fixed payments
businesses when price of product rises faster than price of resources
who loses in inflation
large cash savings
lenders at low fixed interest rate
receiving fixed payments (retired people)
nominal wage
wage measured by dollars without inflation
real wage
wage adjusted with inflation
nominal interest rate
interest rate actually paid for a loan
i%= r% + pi%
real Interest rate
r%= i% - pi%
cost of inflation
menu costs
shoe leather costs
unit of account costs
menu costs
cost money to change listed prices
shoe leather costs
the ghost of transactions increase
people reduce their real money holdings so they must spend more time and effort making additional trips to the bank
unit of account costs
money doesn’t reliably measure the value of goods/services
disinflation
prices increase at a slower rate
good for economy
refered as price stability
deflation
negative inflation rate
prices fall
bad for economy (hoard money and hurt GDP)
income formula of GDP
R+W+I+P
rent
wages
interest
profit
Expenditure formula of GDP
C+Ig+G+Xn
Consumer Spendings
Gross Private Investments
Government Spendings
Net Exports
GDP Growth formula
New GDP-Old GDP/Old GDP X 100
4 types of unemployment
frictional
structural
cyclical
seasonal
what isn’t included in GDP
black market activity
non market affiliated activity
used or intermediate goods
made out of country
transfer payments
stocks and bonds
what is included in GDP
new goods and serives
Buisness productivity
(C+Ig+G+Xn)
3 ways to measure inflation
CPI
PPI
GDP Deflator (the best one)
draw a demand pull graph
draw a cost push graph
natural unemployment formula
frictional and structural unemployment
actual unemployed formula
natural and cyclical unemployment
3 leakages
imports
taxes
savings
3 injections
exports
investments (capital in a business)
government spendings
draw business cycle
deficit budget
amount spent by government is more than collected in taxes
more expenditure than revenue
surplus budget
amount spent by government is less than collected in taxes
more revenue than expenditure
draw circular flow model
hyperinflation
when the value of money is worth nothing, since prices rise too high
