8-29-2007 - Economics: 8/29/2007 Chapter 6: The Monetary...

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Chapter 6: The Monetary System, Prices, and Inflation Constructing a CPI for each year allows one to determine what has happened to the overall price level through time. How CPI is used: 1. Policy makers use it as a measure of overall price stability, as a measure of inflation. a. Time (t) inflation rate = [(CPI 1 – CPI 1-1 ) / CPI 1-1 ] x 100 2. It is used to index payments, and thereby to adjust payments for changes in the purchasing power of money. 3. It is a way to translate from nominal to real values Suppose that the 2003 Nominal wage in Freedonia is w=$4/Labor. What does this mean to the worker? - Is an individual working to get dollars per se? NO. One can use CPI to calculate a real wage. A real Variable is calculated by using the Price Index to correct for inflation. What is Real Wage telling us? What does it mean? So the 2003 Real Wage is: The Real Wage denotes the # of baskets of goods the nominal wage can purchase valued in 1983 prices. This calculation allows one to compare Real Wages and Purchasing Power across time.
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8-29-2007 - Economics: 8/29/2007 Chapter 6: The Monetary...

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