ch.12

today's dollars =

another time's dollars x (price level today)/ (price level in another time)

money

any asset regularly used in transactions

the CPI measures the prices of aa fixed basket of goods, so it effectively assumes that people...

assumes that people keep buying the same number of bananas no matter how expensive they get

indexation

automatically adjusting wages, benefits, tax brackets, and the like to compensate for inflation

inflation 1: find out what people buy

first thing the government needs to do is to figure our what to put into the basket and how much of each item to put into it-- to represent the goods and services that the average consumer buys

The macroeconomic phenomena of inflation

generalized rise in prices

one of the key goals of the Federal Reserve is?

goal is to achieve low and stable inflation

producer price index (PPI)

inflation experienced by businesses is measured by this. Measures the price of inputs into the production process.

because the CPI only tracks the changing price of EXISTING goods, it doesn't do what?

it doesn't account for the reduction the cost of living due to the introduction of new products

GDP deflator equation

(nominal GDP)/ (Real GDP) x 100

in order to measure inflation

-find out what people buy collect prices -tally up the cost of the basket -calculate inflation as the --percentage change in the price of the basket

unit of account

its a common unit that people use to measure economic value

inflation 2: collect prices from the stores where people do their shopping

once you've assembled a representative basket of goods and services, you need to track how much it costs to buy everything in it

when you hear the terms "inflation ticks up" or "inflation falling," it's typically about....?

phrase about the CPI

what does a 2% inflation mean?

prices are 2% higher cost of living is 2% higher a dollar buys 2% less that it did last year

nominal wage rigidity

reluctance to cut nominal wages

inflation 4: calculate the inflation rate

remember that this is the percentage change in the price of that fixed basket of goods over a year

inflation rate

the annual percentage increase in the average price level, and its calculated as the percentage increase in the average price level, and its calculated as the percentage change in the price of this

if the price of a basket rose from $100 to $102 this year, the inflation is what?

the inflation is 2%

money illusion

the mistaken tendency to focus on nominal dollar amounts instead of inflation-adjusted amounts

Why is the CPI an imperfect measure of the cost of living, what's the problem?

the problem is that it tracks the changing price of a FIXED basket of goods, while in reality, people often change the basket of stuff they buy

nominal interest rate

the stated interest rate without a correction for the effects of inflation

personal consumption expenditure deflator

rather than focus on the CPI, the Fed sets this target. This is an alternative measure of inflation based on a slightly different basket of goods and services

inflation undermines the productive benefit of money

when inflation is low and stable, money serves its three functions well and the economic engine hums along

double coincidence of wants

you can only trade your extra milk for bread if you can find someone who wants milk and coincidentally have bread

real interest rate =

nominal interest rate - inflation rate

deflation

a generalized decrease in the overall level of pries

inflation

a generalized rise in the overall level of prices. Can also be described as a rise in the cost of living.

GDP deflator

a price index that tells us about the rising prices of all goods and services produced

what does deflation cause

can cause big problems in the economy because some people stop buying goods and services in order to wait for them to get cheaper

consumer price index (CPI)

measure for inflation....an index that tracks the average price consumers pay over time for a representative "basket" of goods and services

nominal value

measured in dollars whose values may fluctuate over time. Can rise or fall due to either changing quantities or inflation

what exactly does CPI measure?

measures how much prices change on average, but not all prices rise by the same amount

real interest rate

measures the interest rate in terms of changes in your purchasing power.

three functions of money

medium of exchange unit of account store of value

CPI use: cost of living adjustments

mentioning indexation

specialize

money eliminates constraints, creating opportunities for you to......you can focus on the narrow set of tasks where your skills are most valuable

what are some of the problems with money illusion?

money illusion can distort decisions money illusion can lead to mis-pricing money illusion creates nominal wage rigidity

real variable

had been adjusted to account for the influence of inflation.

real value in 2012 dollars =

(nominal value in year t dollars) x (price level/price level)

inflation rate

(price level this year)- (price level last year) / (price level last year)

chained CPI

an inflation measure that tis designed to update the basket of goods each month to correct for substitution bias

why do people change what they buy?

people do this so that they can achieve a given quality of life at a lower cost as new products are developed and as the availability and price of goods and services change relative to other options

the microeconomic phenomena of relative price adjustment

price of individual goods rises or falls relative to other prices as their specific supply and demand ebbs and flows

money is a store value

storing your purchasing power for another day

inflation 3: tally up the price of the basket of goods and services

tally up the price of the representative basket of goods and services, accounting for the fact that this basket includes more of some items than others

core inflation

when forecasters look for the underlying trend in inflation, they consult an alternative measure of inflation that excludes food and energy

substitution bias

the overstating of inflation that occurs because people substitute toward goods who prices rise by less

inflation data are used for many different tasks, what are the tasks?

they're a guideline for cost-of-living adjustments, an input to adjusting financial and economic indicators, a guidepost for Federal Reserve policy makers, and an indicator that forecasters use to project where the economy is going.

why would you SUBSTITUTE what's in your shopping basket?

to find cheaper ways to achieve the same quality of life

one goal of the CPI is to measure....?

to measure changes in the cost of living--how much your spending has to rise to maintain a given quality of life

you're using money as a medium of exchange whenever ...

used whenever you hand it over to buy stuff or when you accept it from your employer in exchange for you hard work

why is the producer price index (PPI) useful?

useful because it helps businesses see how the prices that matter to them are changing and can help you keep tabs on what's likely happening to you competitors' costs.

why is the real interest rate useful?

useful because it shifts your focus from how many extra dollar bills you receive