LEC VI & VII Prices, Money

LEC VI & VII Prices, Money - Macro Module Lectures...

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Click to edit Master subtitle style 11/8/10 Macro Module – Lectures VI & VII Prices, Inflation, Money, Banking System and Monetary Policy
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11/8/10 Measuring the Price l Price level l Average level of prices in the economy l Index l Series of numbers used to track a variable’s rise or fall over time 22 100 period base in measure of Value period current in measure of Value ×
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11/8/10 The Consumer Price l Index of the cost, through time, of a fixed market basket of goods purchased by a typical household in some base period l Includes household purchases of l New goods (part of GDP) l Used goods l Imports 33
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11/8/10 The Consumer Price l CPI measures the prices of all goods and services bought by U.S. households 44 100 period base in basket market of Cost period current in basket market of Cost CPI × =
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11/8/10 Tracking and 55
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11/8/10 From Price Index to l Inflation rate - measures how fast the price level is changing l Percentage change in the price level from one period to the next l Deflation l A decrease in the price level from one period to the next 66
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11/8/10 How the CPI is Used l As a policy target l To index payments l To translate from nominal to real values 77 100 index Price value Nominal value Real × =
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11/8/10 The Rate of Inflation Using the CPI, 1950-2005 88
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11/8/10 Real Variables and Adjustment for Inflation l Comparing dollar values over time l Not number of dollars l Purchasing power 99 100 CPI wage Nominal wage Real 2006 2006 2006 × =
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11/8/10 Problem 6-7 l If there is 5% inflation each year for 8 years, what is the total inflation rate [i.e, the total percentage rise in price level] over the entire 8-year period?
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11/8/10 The price level would rise by 5% each year, to the values shown in the following table. The total amount of inflation = (147.75 – 100)/100 = 0.4775 = 47.75%. Year Price Index at Year End 1 105 2 110.25 3 115.76 4 121.55 5 127.63 6 134.01 7 140.71 8 147.75
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11/8/10 GDP Price Index and l GDP price index l Index of the price level for all final goods and services included in GDP l Measures the prices of all goods and services that are included in U.S. GDP l Used to calculate real GDP 1212
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11/8/10 The Costs of Inflation l The inflation myth l Inflation erodes the average purchasing power of income in the economy l Inflation l Can redistribute purchasing power from one group to another l Does not directly decrease the average real income in the economy. 1313
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11/8/10 The Redistributive l Inflation can shift purchasing power l Away from those who are awaiting future payments l Toward those who are obligated to make payments l Accurately expected inflation does not shift purchasing power 1414 P % - Nominal % Real % =
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11/8/10 The Redistributive l Nominal interest rate l The annual percent increase in a lender’s dollars from making a loan l Real interest rate l The annual percent increase in a lender’s purchasing power from making a loan 1515 inflation of Rate - rate interest Nominal rate interest Real =
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This note was uploaded on 11/07/2010 for the course ECON 0001 taught by Professor Kitsikopoulos during the Spring '08 term at NYU.

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LEC VI & VII Prices, Money - Macro Module Lectures...

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