Key fed tool federal funds interest rates fomc sets

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
● 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

○ 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