Chapter_6 - Getting Started Hyperinflation A situation in...

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Getting Started Hyperinflation A situation in which the inflation rate is "extremely" high Prices rise at a rate of 50% per month or more Experienced by Several Latin American countries, Israel Germany in the 1920s, Hungary 1945-46 Transition economies like Russia Confederacy of U.S. 1861-65 Yugoslavia 1993-94, Greece 1943-44 Hyperinflation In Germany it became less expensive to use currency for burning to  keep warm than to spend it (1923) Yugoslavia attempted price controls with the result that bakers stopped  making bread and Belgrade was without bread for a week (1993) Restaurants in Brazil do not list prices --- instead a code number is used  and a pull-out sheet at the back of the menu, changed every few days,  contains prices (1990) What are the effects of Inflation?
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On measurement On interpreting price changes On economic performance On welfare On the interest rate Purchasing Power Real values depend upon prices "Real" refers to purchasing power Real value of money declines when prices increase Fixed nominal (money) incomes decline in real value  when prices rise Measuring Inflation GDP Deflator (P) An index of prices obtained indirectly from the  calculation of real GDP
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Consumer Price Index (CPI) A measure of the average of the prices paid by urban  consumers for a fixed market basket of consumer  goods and services relative to its cost in a base  period CPI CPI = current cost of fixed basket divided by base- year cost of fixed basket Measures changes in the cost of a typical market  basket Is used to eliminate the effects of inflation from  economic data The Consumer Price Index Reading the CPI Numbers The CPI is defined to equal 100 for a period called the  reference base period Reference base period
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A period for which the CPI is defined to equal 100.  Currently, the reference base period is 1982-1984 The Consumer Price Index In December 2000, the CPI was 174.3 The average of the prices paid by urban consumers  for a fixed market basket of consumer goods and  services was 74.3 percent higher in December 2000  than it was on the average during 1982-1984 The Consumer Price Index Constructing the CPI Three stages: Selecting the CPI basket Conducting the monthly price survey Calculating the CPI The Consumer Price Index The CPI Basket
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Make the relative importance of the items in the CPI basket the same as  in the budget of an average urban household CPI-U Measures the average price paid by all urban households CPI-W Measures the average price paid by urban wage earners and clerical  workers The composition of the CPI’s "basket" The Consumer Price Index The Monthly Price Survey
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This note was uploaded on 03/30/2009 for the course ECON 202 taught by Professor O during the Spring '09 term at Michigan State University.

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Chapter_6 - Getting Started Hyperinflation A situation in...

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