# assign8 - Intro Macro N Sheflin ASSIGNMENT 8 NOTES Price...

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I n t r o M a c r o N . S h e f l i n ASSIGNMENT 8 NOTES: Price Indices, Inflation and the Short-Run Phillips Curve A quick look at Price Indices, Deflating nominal variables to get real variables and, more importantly, SR Inflation and the Short-Run 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 1-7 in 50 multiple choice questions more or less randomly drawn from hw 1-7 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 Non-accelerating 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/core-logic/ 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/el2010-02.html And glance at DeLong’s Inflation page: http://www.j-bradford-delong.net/multimedia/Inflation.html and Phillips curve http://www.j-bradford-delong.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 cost-of-living 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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assign8 - Intro Macro N Sheflin ASSIGNMENT 8 NOTES Price...

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