ECN 204 Chapter Notes - Chapter 7: Potential Output, Shortage, Fixed Income

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25 Jul 2016
Class 3 – Chapter 7 – CECN204
Costs of unemployment
1. Micro
2. Macro
- Government Expenditure/  Revenue
- Economy: Loss of potential GDP
Okun’s Law: If unemployment increases by 1%, GDP actually falls from 2 – 2.5% - VICE VERSA
Inflation: An Increase in the average price level over time
Lowers purchasing power and the value of our money
CPI: Measures change in the average prices of a fixed basket of about 600 goods and services,
consumed by an average urban household.
7 Groups in CPI (Statistics Canada):
1. Food
2. Clothing
3. Housing (rent, utilities, mortgage)
4. Transport (gas, insurance)
5. Health and/ Personal care
6. Education and recreation (entertainment, tuition, movies)
7. Tobacco and Alcohol
Calculating Inflation rate:
Inflation Rate2016 = (CPI2016)-(CPI2015) x 100
Rule of 70: The number of years it takes for the price to double
= 70/ Interest Rate
Types of Inflation:
1) Demand pull inflation (Buyers/ consumers): Excess demand compared to production
2) Cost push inflation (sellers/ producers): If cost of production increase (e.g gas, wage), it
pushes up prices.
Effects of inflation:
1. Decreases real income and real GDP
2. Fixed income groups suffer
3. Financial asset owner lose
4. Physical Asset owners gain
5. Unanticipated inflation benefits debtors/ borrowers at the expense of the expenses of
creditors /lenders
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