SS 141 Chapter Notes - Chapter 4: Income Tax, Core Inflation, Price Level
Document Summary
Inflation-general and ongoing rise in price level in the entire economy. Does not refer to change in relative prices. Pressure for prices to rise shift in equilibrium (supply and demand) Basket of goods and services-different items that individuals, businesses and organizations typically buy. Combing the average individual prices can be misleading because some products matter more than others: more expensive purchases or smaller ones. To construct an overall price level"s measure, you compute a weighted average of the prices of the items in the basket and the weights are based on the quantities of the goods and services that the people buy. Calculate annual rate of inflation: (level in new year level in previous year) = % change. Price level in each period is reported as index number instead of dollar amount. Price index-created to calculate overall average change in relative prices over time. Economists typically choose one year to be the base year when measuring change in prices.
