1 / 10

Inflation

Inflation. AP Macroeconomics Fall 2013. Price Level & Real Income. As long as wages rise with price levels, inflation doesn’t cause harm standard of living Real Wage = Wage rate  100 Price index Real Income = Income  100 Price index. Rate of Price Changes.

corin
Download Presentation

Inflation

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Inflation AP Macroeconomics Fall 2013

  2. Price Level & Real Income • As long as wages rise with price levels, inflation doesn’t cause harm standard of living Real Wage = Wage rate  100 Price index Real Income = Income  100 Price index

  3. Rate of Price Changes • Inflation Rate – overall increase per year Inflation Rate = Price level in year 2 – Price level in base year● 100 Price level in base year Real Wage Increase = Wage rate increase – Inflation rate Significant costs of high inflation rates • Shoe-leather costs – Greater #s of banking transactions • Menu costs – Changing listed prices • Unit-of-account costs – Locked-in contract terms

  4. Winners & Losers from Inflation • Interest rate – Extra percentage that borrowers must pay for the use of money • (Most) contracts lock in a fixed rate • Nominal v. real interest rate Nominal interest rate – inflation rate = Real interest rate • If inflation rate > expected inflation, borrowers win • If inflation rate < expected inflation, lenders win

  5. Disinflation • Disinflation – Willfully bringing down inflation rates • Our government intervenes when inflation rises above 2% • Government policies can depress the economy

  6. Cost-Push Inflation • When universally-important inputs rise in price, this reduces AS and increases price

  7. Demand-Pull Inflation • When AD is greater than AS, this pushes up prices

  8. Calculating/Measuring Inflation • The price index reflects the aggregate price level • Based on “typical consumption” (market basket) Price index = Cost of market basket in Year 2 X 100 Cost of market basket in base year Inflation rate = PI in Year 2 – PI in Year 1 X 100 PI in Year 1

  9. Consumer Price Index • How costs for families changes over time • Based on 1982-1984 • Criticized for not being accurate because of: • Substitutes • Innovation

  10. Other Measures • PPI – Measures costs for producers; responds more quickly than CPI • GDP Deflator – Ratio of nominal GDP to real GDP GDP Deflator = Nominal GDP x 100 Real GDP • All three indexes are closely correlated

More Related