Textbook Notes (369,082)
Economics (818)
ECON 1100 (224)
Chapter 6

Chapter 6

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Department
Economics
Course Code
ECON 1100
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Chapter 6: Measuring the Price Level and Inflation The Consumer Price Index: Measuring the Price Level Price Level: the overall level of prices at a point in time as measured by a price index such as the CPI CPI: measures the cost in that period of a standard basket of goods/services relative to the cost of the same basket of goods/services in a fixed year, called the base year  CPI=(cost of base-year good/service in current year)/(cost of base- year good/service in base year) X 100 Price Index: a measure of the average price of a given class of goods/services in a base year Inflation Rate of Inflation: the annual percentage rate of change in the price level as measured for example by CPI Deflation: a situation in which the prices of most goods/services are falling over times to that inflation is negative Adjusting for Inflation Nominal Quantity: a quantity that is measured in terms of its current dollar value Real Quantity: a quantity that is measured in constant dollar terms Deflating (the Nominal Quantity): the process of dividing a nominal quantity by price index (such as CPI) to express the quantity in real terms Real Wage: the wage paid to workers measured in terms of real purchasing power Indexing: the practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index, prevents purchasing power od the nominal quantity from being eroded by inflation Nominal vs. Real Interest Rates Nominal Interest Rate: the type of interest rate you usually encounter in everyday life; the price paid per dollar borrowed per year Real Interest Rate: nominal interest rate – inflation rate  r=i- o Where… r=real interest rate, i=nominal/market/interest rate, and =inflation rate Anticipated Inflation: when the rate of inflation turns out to be roughly what most people expected Unanticipated Inflation: when the rate of inflation turns out to be substantially different from what most people expected Fisher Effect: the tendency for nominal interest rates to be high when inflation is high and low when inflation is low Types of Price Changes - To calculate CPI…  100 X (CPI current period – CPI previous period)/(CPI previous
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