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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
○Question= The year that had the highest prices also had the highest inflation rate?
●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 ●Deflationis a fall in prices●Disinflationis 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
○So you can say that consumer prices rose since the base period which is in the early 80s (100 back then). Prices are two and a half times as high.●Inflation rate of this aka the percent change in the CPI new-old/old * 100○2.1% over the last year. The fed is meeting its goal since their goal is 2% inflation a year. The other part of mandate is maximum employment and low unemployment●Current CPI is 243 which is at the top●Question: consumers __ see deflation since 1970 while the economy as a whole ____/ ○Deflation for consumers- or price index- if you look at the graph you don’t see a huge period of price decrease, but during the great recession it did fall. ○But measuring the economy as a whole, you would use the GDP deflator