8-27-2007 - to compare price levels across time. o An...

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Economics: 8/27/2007 Chapter 5 Continued Problems with measuring unemployment: - Involuntary part-time workers - Discouraged workers who quit searching Chapter 6- The Monetary System, Prices, and Inflation Money serves three functions: 1. Way of storing wealth, store of value 2. Unit of account: a common way of measuring value, denoting prices 3. Means of payment: commonly accepted means of effecting trade The United States operates under a paper fiat standard. Our money is a paper issued by fiat (that is, by degree) by the Federal Government. It has the status of money accepted in exchange for goods due to its legal status as such. “This note is legal tender for all debts, public and private.” Measuring price level and inflation: - Interested in price level, (average dollar prices) and how it changes through time. - An aggregate price level is constructed by computing an index number which allows one
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Unformatted text preview: to compare price levels across time. o An example: Consumer Price Index (CPI) is constructed by BLS as follows: A basket of consumer goods of interest to the average urban consumer is determined. A base year is determined. It is currently 1983. The dollar cost of the basket is in 1983 prices. The dollar cost of the basket is determined for each year of interest, say 2003. The CPI for 2003 is [(2003 $cost of basket)/ (1983 $cost of basket)] x 100. There are different price indices depending on the goods and prices of interest. Each is constructed in much the same way, differing only in the basket of goods in concern. Inflation = [176.7 (2001) 174 (2000)] / 174 (2000) = .016 x 100 = 1.6%...
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This note was uploaded on 03/18/2008 for the course ECON 2006 taught by Professor Rdcothren during the Fall '08 term at Virginia Tech.

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