ECO 1102 Lecture Notes - Lecture 10: Human Capital, Aggregate Demand, Seigniorage

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17 Jun 2015

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Eco1102 - lecture 10 - money growth and inflation. Price level is measured by cpi and gdp deflator. Take the price level as the price of goods and services. When price level rises, people have to pay more for the goods and services they buy. Take the price level as a measure of the value of money. A rise in the price level means a lower value of money. Price p measures the number of dollars needed to buy a basket of goods and services. If p is the price of goods and services measured in terms of money, 1/p is the value of money measured in terms of goods and services. 1/p means how many goods that one dollar can buy. Inflation drives prices up and drives the value of money down. Inflation is an economy-wide phenomenon that concerns the value of the economy"s money. When the overall price level rises, the value of money falls.

Related Questions

Measures of Inflation The GDP deflator is the broadest, most inclusive measure of change in the country's price level since it includes all final goods and services produced and sold. But the GDP deflator is not used by the government or economists as the benchmark measure of inflation; instead, the consumer price index (CPI) is used to determine changes in the cost of living. What is the shortcoming of the GDP deflator as a measure of inflation for households, and why is the CPI considered to be a more useful measure?

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a) Assuming that money market equilibrium always exists, if the national price level P increases by 5%, and real money demand L increases by 2%, then the nominal money supply M needs to increase by:

a. decrease by 7%.

b. decrease by 3%.

c. increase by 7%.

d. increase by 3%.

b) A real depreciation of the dollar against the euro occurs when:

a. there is a nominal depreciation of the US dollar against the euro which is at a higher rate than the US inflation rate, regardless of the European rate of inflation.

b. there is a nominal depreciation of the US dollar against the euro which is at a higher rate than the sum of the US inflation rate and the European inflation rate.

c. the cost of the US basket in terms of the European basket (European basket per US basket) rises, where "basket" refers to the basket of goods and services used in a country's price index.

d. there is a nominal depreciation of the US dollar against the euro which is at a higher rate than the European inflation rate, regardless of the US rate of inflation.

e. the cost of the European basket in terms of the US basket (US basket per European basket) rises, where "basket" refers to the basket of goods and services used in a country's price index.