Economics 101Chapter04

Economics 101Chapter04 - 1 Objectives for Chapter 4...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Objectives for Chapter 4 Inflation in the Twentieth Century At the end of Chapter 4, you will be able to: 1. Define “inflation” . 2. Describe how the Consumer Price Index (CPI) is calculated. 3. Explain what is meant by a "market basket" . 4. Explain what is meant by the "base year" . 5. Explain what a COLA is. 6. Explain how the Percentage Change in the Consumer Price Index is calculated. 7. Explain the difference between "Nominal Income" and "Real Income" . 8. Briefly describe the history of inflation in the United States since 1960. 9. Explain what is meant by "hyperinflation" ? 10. Name and explain the reasons that the Consumer Price Index overstates the change in the "cost of living"? a. Define "Substitution Bias" . 11. Explain how the GDP Deflator is calculated. And explain why it is the better measure of inflation? 12. Name the groups of people who “win” from unexpected inflation and the groups of people “lose” . In each case, explain why. 13. Define "nominal interest rate" and "real interest rate" . 14. Explain why inflation shifts resources from private to government activities. 15. Define "bracket creep" . 16. Explain why inflation may do each of the following (and thus cause real GDP to grow slower than it otherwise would ): a. reduce savings b. increase borrowing for consumer goods c. “mis-channel” savings away from financial institutions d. reduce business investment spending 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Chapter 4 Inflation in the Twentieth Century (latest revision May 2008) We have encountered inflation several times in the first three chapters. Inflation has been defined as a general increase in the prices of goods and services . Notice the words “general increase”. An increase in the price of gasoline is not inflation. Inflation requires that the prices of most goods and services are increasing. In this chapter, we will consider inflation using the same approach that we used with unemployment in Chapter 3. First, we will describe and evaluate the measures of inflation. Then, we will consider the effects of inflation and the reasons that inflation presents a serious problem for society. 1. Measures of Inflation There are two important measures of inflation – the Consumer Price Index (CPI) and the GDP Deflator . As you will see, for the purposes of this course, the GDP Deflator is the better measure of inflation. But for millions of people, the Consumer Price Index (CPI) is very important because they have a COLA tied to the Consumer Price Index. A COLA is a Cost-of-Living Adjustment . If you have one, your income is adjusted automatically to reflect the increase in prices, as measured by the increase in the Consumer Price Index (CPI) . For example, if the Consumer Price Index (CPI) shows that prices increased by 2% and you have a COLA, you will receive an automatic 2% increase in your income. Certain government programs, such as Social Security, have COLAs. Many workers also have them through their contracts with employers. Because the Consumer Price Index (CPI) affects the incomes of millions of people, let us begin by
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 13

Economics 101Chapter04 - 1 Objectives for Chapter 4...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online