Macro Ecconomoics - Chapter 8

Capital gains taxes

are taxes on the gains realized by selling an asset for more than its purchase price.

Menu costs

are the costs of changing prices.

shoeleather costs

are the resources that are wasted when people change their behavior to avoid holding money.

Calc inflation rate

inflation rate = P2-P1/P1 *100

nominal wage

is his or her wage expressed in current dollars. The nominal wage is similar to nominal GDP.

consumer price index (CPI)

is the measure of the price level based on the consumption patterns of a typical consumer.

The real wage

is the nominal wage adjusted for changes in the price level.

Output

is the production that a firm creates.

Inflation is costly for society when

it causes people to do things they wouldn't do in an environment of price stability.

other causes of inflation

First, large government debts often spur governments to choose to increase the money supply rapidly. Second, surprise increases in the money supply can temporarily stimulate an economy toward more rapid growth rates.

Deflation

occurs when overall prices fall; it is negative inflation.

price level in todays dollars =

price in earlier time dollars * (price level today/price level in entier time)

inflation occurs with

: when the supply of money in an economy grows relative to the quantity of goods and services, then it takes more money to buy any particular good or service. Money then becomes less valuable relative to goods and services—and this relationship constitutes inflation

Calc CPI

CPI = Basket price/basket price of base year *100 1. Define the basket of goods and services and their appropriate weights. 2. Determine the prices of goods across periods. 3. Convert to the index number for each period.

What problems does inflation bring?

Inflation imposes shoeleather costs: it causes people to waste resources as they seek to avoid holding money. Inflation can cause people to make decisions based on nominal rather than real monetary values, a problem known as money illusion. Inflation adds menu costs. Inflation introduces uncertainty about future price levels. Because this makes it difficult for consumers and producers to plan, it impedes economic progress. Unexpected inflation redistributes wealth from lenders to borrowers. Inflation makes it difficult for producers to read price signals correctly; this is known as price confusion. Inflation distorts people's tax obligations.

What is the cause of inflation?

Inflation occurs when governments increase a nation's money supply too quickly. Governments often increase the money supply too quickly when they are in debt or when they desire a short-run stimulus for the economy.

How is inflation measured?

Inflation rates are calculated as the percentage change in the overall level of prices. Economists use the CPI to determine the general level of prices in the economy. Determining which prices to include in the CPI can be challenging for several reasons: consumers change what they buy over time, the quality of goods changes, and new products and sales locations are introduced.

inflation

we defined inflation as the growth in the overall level of prices in an economy—so inflation occurs when prices rise throughout the economy.

Money illusion occurs

when people interpret nominal changes in wages or prices as real changes.