ECON20023 T1 2008 Lecture 10

ECON20023 T1 2008 Lecture 10 - ECON20023 ECONOMICS FOR...

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Based on slides from Layton et al (2005) 1 ECON20023 ECONOMICS FOR BUSINESS T1 2008 LECTURE 10 Galina Ivanova, CQU
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2 Key concepts Chapter 13 Inflation, consumer price index (CPI) Unemployment Chapter 14 aggregate expenditure aggregate demand output model aggregate demand–aggregate supply model Keynesian and classical views
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3 The meaning and measurement of inflation Inflation is an increase in the general (average) price level of goods and services in the economy. is not an increase in the price of any specific product. The CPI is an index that measures changes in the average prices of consumer goods and services. The ABS conducts quarterly surveys of the prices of items typically purchased by an average family. It is a fixed-weight price index – the composition of the basket remains unchanged from one period to the next.
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4 The CPI formula cost of the market basket of  products at current year prices cost of the same market basket of products at base-year prices CPI = x 100 CPI in given year – CPI in previous year CPI in previous year Annual rate of      = inflation        x 100
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5 Australia’s inflation rate: 1950–2004
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6 Criticism of the CPI CPI is not a perfect measure of the rate of inflation: The basket on which the CPI is based may not be an accurate reflection of consumer spending patterns, or for groups of consumers (e.g. pensioners, students) CPI is not adjusted for quality changes The market basket ignores the law of demand (the substitution bias problem).
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7 Consequences of inflation Inflation reduces the purchasing power of money, so it shrinks real incomes. Inflation redistributes wealth – it raises the asset value of the wealthy, and the value of assets such as real estate. Inflation’s impact can depend on changes in the real interest rate. Inflation affects decision-making.
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8 Nominal and real income Nominal (or money) income does not measure purchasing power. Real income measures the amount of goods and services that can be bought with nominal income . To gain purchasing power, nominal income must rise faster than the rate of inflation. If nominal income does not keep pace with the rate of inflation, real income falls. nominal income CPI (as a decimal, i.e. CPI/100) Real income =
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9 The real interest rate The real interest rate is the nominal rate of interest minus the inflation rate. Nominal interest    –    inflation  rate                       rate Real interest    rate       = If the real interest rate is negative,  lenders and savers lose at the  expense of borrowers.
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10 Inflation and decision-making A low and stable rate of inflation is conducive to efficient decision-making. Economic agents can accurately forecast
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This note was uploaded on 09/06/2009 for the course MGMT econ taught by Professor Galinaivanova during the Spring '09 term at University of Central Arkansas.

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ECON20023 T1 2008 Lecture 10 - ECON20023 ECONOMICS FOR...

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