Ch006 - Chapter 6 Measuring the Price Level and Inflation...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 6 Measuring the Price Level and Inflation Overview This chapter looks at the measurement third of the major macroeconomic variables: the rate of inflation. In particular, it points out how to avoid the confusion in comparing economic conditions over time created by price changes. The chapter looks at how prices and inflation are measured and how to adjust data to eliminate the effects of price changes. It looks at why high inflation can significantly impair an economy's performance to the extent that economic policymakers claim a low a stable rate of inflation as one of their chief objectives. Core Principles Cost-benefit Principle – the principle is applied to a consumer deciding how much cash to hold during a time of inflation. The example also illustrates the shoe-leather costs of inflation. Equilibrium Principle – the text takes a macro view of price changes in individual markets, noting “Multiply this example a million times, and you will gain a sense of how the price system achieves a truly remarkable degree of economic coordination.” Important Concepts Covered Consumer price index Rate of inflation/deflation Nominal versus real Fisher Effect Teaching Objectives After completing this chapter, you want your students to be able to: Define inflation, deflation and the consumer price index Explain how the CPI is measured Calculate the price index and the rate of inflation Convert from real to nominal values Explain the causes and effects of the CPI overestimating true inflation Discuss the five costs of inflation Define hyperinflation and its effects 59
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Define and calculate the nominal and real rate of interest Discuss the relationship between the inflation rate and interest rates Answers to Text Questions and Problems Answers to Review Questions 1. The official cost-of-living index, the CPI, measures the cost of buying a particular “basket” of goods and services, relative to a specified base year. The official basket of goods and services is intended to correspond to the buying patterns of the typical family. However, a family whose buying patterns differ from the average may find that changes in its cost of living are not well captured by the official CPI. For example, if the price of peanut butter rises sharply, the cost of living of a family that buys much more peanut butter than the typical family will increase more than the CPI, all else being equal. 2. The price level measures the cost of a basket of goods and services, relative to a base year. The CPI is one standard measure of the price level. In contrast, the rate of inflation is the annual percentage change in the price level. For example, suppose that the basket of goods and services on which the CPI is based cost $100 in the base year, $150 last year, and $154.50 this year. The price level this year is 1.5450 ($154.50/$100.00). The inflation rate from last year to this is the percentage increase in the cost of the basket since last year, or 3%.
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern