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ASSIGNMENT 8
NOTES:
Price Indices, Inflation and the ShortRun Phillips Curve
A quick look at
Price Indices, Deflating nominal variables to get
real variables and,
more importantly,
SR
Inflation and the ShortRun Phillips Curve.
. This complete our first look at the SR Keynesian model of the
economy. We will turn in future weeks to the LR Classical model and other issues, including economic
growth, international economics, and more
ONLINE MIDTERM
–Must be taken in
1 hour window
during the period from Tuesday 3/8
6pm and
Thursday 3/10
6pm.
COVERS
weeks 17
in
50
multiple choice questions more or less randomly drawn
from hw 17 and from big questions, and investment game.
Week 8 material will NOT be on the exam.
READING
Chapter 5 (Section on Price Indices and Inflation only), 16 A, 16 B (up to but not including
“The Nonaccelerating Inflation Rate of Unemployment )
Also, look at the CPI at:
http://www.bls.gov/news.release/cpi.nr0.htm
and
Why the core cpi:
http://krugman.blogs.nytimes.com/2010/02/26/corelogic/
Bernanke on Deflation, in 2002
(prophetic?)
http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm
And skim a recent article on the SR Phillips curve:
http://www.frbsf.org/publications/economics/letter/2010/el201002.html
And glance at DeLong’s Inflation page:
http://www.jbradforddelong.net/multimedia/Inflation.html
and
Phillips curve
http://www.jbradforddelong.net/multimedia/USPCurve.html
.
– a bit old
WHERE WE ARE –OUTLINE OF KEY POINTS TO DATE AND WHY WE DID THINGS IN THE
ORDER WE FOLLOWED.
see bottom of assignment for more
KEY POINTS OF THIS WEEK
The CPI is a fixed base year quantity
price index
and considered by some a
costofliving index
(although
problems with this). The CPI can be used to track changes in prices of goods and services purchased for
consumption by households, i.e., of the
consumer basket
.
Typically an index is scaled so that it is equal to 100 at a chosen point in time, so that all other values of the
index are a percentage relative to this one.
CALCULATING THE CPI
Basically we
take the prices and quantities of all goods and services to be
included in the ‘market basket’ bought by consumers (determined by a survey) and then, calculate total
expenditure on the basket by multiplying the prices and quantities of each item. In each subsequent year,
we recalculate total expenditures using that years prices but the
BASE YEAR QUANTITIES
so that
changes in total expenditure reflects price changes only. We divide each
years total expenditure by the
base year’s
and multiply by 100 to get the index in this next year. We interpret the index as telling us the
% change in the ‘average’ price of all the items in the index. (example: say 2005 is the base year and total
expenditure (P2005 x Q2005) is $7 billion. In 2006, we calculate total expenditure to be $7.7 billion
(P2006 x Q 2005) then in 2005 the index is 100 x 7/7 = 100
and in 2006 it is 100 x 7.7/7 =110
i.e. prices
have risen 10%
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 Spring '08
 sheflin
 Macroeconomics, Inflation, Phillips Curve

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