○ Congress tells the fed what they should focus on… “Dual Mandate” ■ “Promote effectively the goals of maximum employment, stable prices* and moderate long-term interest rates” ● Stable prices would be 2% inflation per year ○ Monetary policy is changes in interest rate & M1 & M2 to achieve these goals ○ Fed head chair: Janet Yellen ■ Also heads the “Federal Open Market Committee” (FOMC) ● Decide what the fed can do to reach goals ■ Key fed tool- federal funds interest rates (FOMC sets this) .5 rn ● What banks charge each other for overnight loans ○ A “wholesale” interest rate ○ It in turn influences other interest rates Notes on Jan 31
● Prices rose of this 50 year period (inflation) ● “History doesn’t repeat, but it does rhyme” ○ Question = The year that had the highest prices also had the highest inflation rate? ■ No. Prices are at their highest today, but prices rose most rapidly during the 70’s because that is the time period with the steepest slope
● Helps answer the previous question ^^^^^ ● GDP Deflator is blue about 112% today and the inflation is red around 1.3%. ● High red inflation means prices are rising rapidly during that time period ● GDP deflator and Production since 1970 ○ Question - which most accurately reflects the U.S. economy since 1970: Production ______ rises and prices ___ rise. ■ Usually, always ● Deflation is a fall in prices ● Disinflation is less inflation ○ Question: In these data (deflator), the U.S. __ had deflation and ___ had disinflation in this chart (the same one of this page) ■ Has not, has ○ Question: How do we measure inflation for the entire economy? ■ GDP Deflator= (nominal/real)100 ■ It is a price index that measures the “price level” (versus its
base year) ■ Inflation is the percent change in a price index ● PART E ○ The consumer price index ○ Question - On average, parents of Penn State students earn above $100,000. Say that in 2047 you earn $200,000. Is this enough to say that in a material sense that you’ll be better off than them? ■ No. You need more information ○ CPI can be used to remove inflation from nominal prices and wages ■ Def: nominal (money) price or wage- how many dollars it takes to buy something or hire someone ■ Def: Real price or wage- nominal value with inflation explicitly removed ○ Question- What would be different in your calculation in Step 2 compared to Step 1 in your worksheet? ■ Prices ○ Question- CPI is best thought of as ■ Not in dollars- dollars cancel out ■ A measure of prices versus a base year- answer ○ CPI ■ Is the ratio of the price of a market basket of goods & services for the typical consumer in one month compared to the (arbitrary) base period*100 ■ It measures price level for consumers ■ Base period: 1982-84 (CPI=100) ■ Actual CPI weights of market basket items ● Food & Beverages 15.3% ● Housing- rent 24.0% ● Housing- mortgage 17.1% ● Apparel 3.6% ● Transportation 16.9% ● Med care 7.1% ● Recreation 6% ● Edu/Comm 6.8% ● Other goods & service 3.4% Feb 2 ● CPI 2015= 238.0 ● CPI 2016=243.0
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