Chap06-07 - 6-2Getting Started Hyperinflation A situation...

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Unformatted text preview: 6-2Getting 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 1943-446-3Hyperinflation 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) 6-4What are the effects of Inflation? On measurement On interpreting price changes On economic performance On welfare On the interest rate6-5Purchasing 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 rise6-6Measuring Inflation GDP Deflator (P) An index of prices obtained indirectly from the calculation of real GDP 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 period6-7CPI 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 data6-8The 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 A period for which the CPI is defined to equal 100. Currently, the reference base period is 1982-19846-9The 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 1982-19846-10The Consumer Price Index Constructing the CPI Three stages: Selecting the CPI basket Conducting the monthly price survey Calculating the CPI6-11The Consumer Price Index The CPI Basket 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...
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Chap06-07 - 6-2Getting Started Hyperinflation A situation...

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