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Unit 4: Price Stability and Inflation

Unit 4: Price Stability and Inflation. Some idea of inflation comes from seeing a youngster get his first job at a salary you dreamed of as the culmination of your career. - Bill Vaughan. Created: 2012 by Jim Luke.

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Unit 4: Price Stability and Inflation

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  1. Unit 4: Price Stability and Inflation • Some idea of inflation comes from seeing a youngster get his first job at a salary you dreamed of as the culmination of your career. • - Bill Vaughan Created:2012by Jim Luke. This work is licensed under the Creative Commons Attribution-NonCommercial License

  2. Society's Goals for Macro System • Growth • Stable Prices & Money • Full Employment • Stability of Business Cycle

  3. Money: an elastic measuring stick License Some rights reserved by Truthout.org

  4. Inflation is a sustained and generalized increase in most prices. • Money loses real value • Most observed (nominal) prices are rising

  5. The Inflation Rate is the % change (annual rate) in most prices as measured by a price index.

  6. Deflation is a generalized decrease in most prices.

  7. Disinflation is a reduction in the rate of inflation.

  8. Terms: - Nominal Prices: actually observed- Real Values: estimated value of goods using “base year” prices.

  9. Inflation erodes financial wealth and fixed incomes.

  10. But inflation also helps debtors and owners of real wealth.

  11. Hyper-inflation Can Destroy.

  12. Deflation Is Very Undesirable (any amount of deflation)

  13. Practical Policy Goal: Low, stable inflation.

  14. Measuring Price Stability • “Price Index”: wtd average of sample of prices • Several Price Indices • CPI • PPI • GDP Deflator • Index Number: base year = 100 • Inflation Rate = % increase in the Price Index each year

  15. Measuring Inflation Rate requires a price index.

  16. A price index establishes price levels relative to an arbitrary “base year”.

  17. Price Index: wtd average of prices based upon comparing the cost of “market basket” of goods each year.

  18. Inflation Rate = percentage increase from year-to-year in price index

  19. There are a lot of different price indices such as CPI, GDP Deflator, PPI, and Billion Prices Project.

  20. Price indices are imprecise due to quality changes, new products, and shifts in preferences.

  21. Inflation needs “momentum”, not just isolated increases. Attempts to measure it use “core inflation”.

  22. What causes inflation? More demand in general than supply.

  23. Nominal Interest Rates include a “real rate” component and an implied/assumed future inflation rate.

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