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# lec17 - Government Tools MACROECONOMICS Fiscal Policy...

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1 MACROECONOMICS Aggregate Output Employment General Price Level 2 Government Tools Fiscal Policy Taxes Government Spending Monetary Policy Interest rates 3 Consumer Price Index CPI gives cost of market bundle in each year relative to the base year. Example: Base year is 1983. Cost of market bundle in 1994: \$2568. Cost of market bundle in 1983: \$1733. CPI (1994) = 2568/1733 x 100 = 1.482 x 100 = 148.2 4 CPI with base of 1983 215.3 2008 207.3 2007 201.6 2006 195.3 2005 188.9 2004 184.0 2003 179.9 2002 177.1 2001 172.2 2000 166.6 1999 163.0 1998 160.5 1997 156.9 1996 152.4 1995 148.2 1994 144.5 1993 140.3 1992 5 Inflation = Change in CPI Inflation from 2005 to 2006: 201.6 – 195.3 6.3 = = 0.032 195.3 195.3 = 3.2% inflation 6 1. CPI in base year is 100. 2. Choice of base year doesn’t matter. 3. CPI overstates effects of price changes by holding market bundle constant.

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7 Inflation rate 1913-2008 -15 -10 -5 0 5 10 15 20 1910 1917 1924 1931 1938 1945 1952 1959 1966 1973 1980 1987 1994 2001 2008 8 Producer Price Index Same as CPI but calculated for a market bundle of inputs to producers. 9 Measures of Aggregate Output Gross Domestic Product: Value of all final goods and services produced domestically. GDP in 2008: \$14.4 trillion 10 Nominal GDP: GDP in prices for that year. Real GDP: Nominal GDP / GDP price index 11 GDP Price Index Like CPI but for all goods produced in

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lec17 - Government Tools MACROECONOMICS Fiscal Policy...

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