Unformatted text preview: he output gap is called inflationary
© Gustavo Indart Slide 8 Growth in Aggregate Output Source: P. Krugman, R. Wells and A. Myatt, Macroeconomics.
© Gustavo Indart Slide 9 Growth in Aggregate Output Source: P. Krugman, R. Wells and A. Myatt, Macroeconomics.
© Gustavo Indart Slide 10 Real GDP per Capita Source: P. Krugman, R. Wells and A. Myatt, Macroeconomics.
© Gustavo Indart Slide 11 Output Gap (Percent of Potential Output) Source: Trading Economics.
© Gustavo Indart Slide 12 Rate of Inflation
rate of inﬂa.on in macroecon The inflation rate is the percentage rate of increase of the level
of prices during a given period:
To measure the rate of inflation, we can calculate the
Consumer Price Index (CPI)
The CPI shows the change in the price level taking into account
a constant basket of goods:
Value of basket of goods in current prices
Value of basket of goods in prices of base period © Gustavo Indart Slide 13 Rate of Inflation (cont’d)
Inflation matters because it erodes the value of
money and the value of fixed incomes
Inflation also creates uncertainty in the economy
and makes more difficult to make forecasts to
facilitate long run economic decisions such as
Fully anticipated inflation has no effect on real
economic variables because it is incorporated in all
Unexpected inflation, on the other hand, favours
debtors and harms creditors
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