macro e conomics unit 4: price stability and inflation some idea of inflation comes from seeing a...
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MACROEconomicsUnit 4: Price Stability and
Inflation
Some idea of inflation comes from seeing a youngster get his first job at a salary you dreamed of as the culmination of your career.
- Bill Vaughan
Created:2012
by Jim Luke.This work is licensed
under the Creative Commons Attribution-
NonCommercial License
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MACROEconomics
Society's Goals for Macro System
GrowthStable Prices & Money
Full EmploymentStability of Business Cycle
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MACROEconomics
Money: an elastic measuring stickMoney: an elastic measuring stick
License Some rights reserved by Truthout.org
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MACROEconomics
Inflation is a sustained and generalized increase in most prices.
Money loses real value Most observed (nominal)
prices are rising
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MACROEconomics
The Inflation Rate is the % change (annual rate) in most prices as measured by a price index.
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MACROEconomics
Deflation is a generalized decrease in most prices.
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MACROEconomics
Disinflation is a reduction in the rate of inflation.
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MACROEconomics
Terms:
- Nominal Prices: actually observed
- Real Values: estimated value of goods using “base year” prices.
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MACROEconomics
Inflation erodes financial wealth and fixed incomes.
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MACROEconomics
But inflation also helps debtors and owners of real wealth.
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MACROEconomics
Hyper-inflation Can Destroy.
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MACROEconomics
Deflation Is Very Undesirable (any amount of deflation)
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MACROEconomics
Practical Policy Goal: Low, stable inflation.
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MACROEconomics
Measuring Price Stability
“Price Index”: wtd average of sample of pricesSeveral Price Indices
CPI PPI GDP Deflator
Index Number: base year = 100
Inflation Rate = % increase in the Price Index each year
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MACROEconomics
Measuring Inflation Rate requires a price index.
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MACROEconomics
A price index establishes price levels relative to an arbitrary “base year”.
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MACROEconomics
Price Index: wtd average of prices based upon comparing the cost of “market basket” of goods each year.
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MACROEconomics
Inflation Rate = percentage increase from year-to-year in price index
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MACROEconomics
There are a lot of different price indices such as CPI, GDP Deflator, PPI, and Billion Prices Project.
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MACROEconomics
Price indices are imprecise due to quality changes, new products, and shifts in preferences.
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MACROEconomics
Inflation needs “momentum”, not just isolated increases. Attempts to measure it use “core inflation”.
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MACROEconomics
What causes inflation? More demand in general than supply.
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MACROEconomics
Nominal Interest Rates include a “real rate” component and an implied/assumed future inflation rate.