Macroeconomics (8)

Even perfectly anticipated inflation imposes costs. Why?

- peoples incme will inevitably fall behind even an anticipated level of inflation 2. anyone holding paper mondey will find its purchasing power falling each year by the rate of inflation 3. Some firms experience menu costs. menu costs are the csts to firms of changing prices on products, shelves exc

It is important that the CPI be as accurate as possible, but there are four biases that make changes in the CPI overstate the true inflation rate

1. substitution bias 2. increase in quality bias 3. new product bias 4. outlet bias

Outlet Bias (CPI)

CPI used to only survey prices at traditional retail outlets. Now it tries to minimize this bias by surveying people about where they actually buy products BLS collects price data primarily from traditional retail outlets such as supermarkets and department stores the effect of consumer purchases from outlet and discount stores

structural unemployment

Mismatch between skills and job requirements. - learn new animation methods

If a 3-month Treasury bill pays 5.5% and the change in the consumer price index (CPI) is 4.7%, what is the real interest rate (the true return to lending)?

Nominal interest rate - real interest rate

which can give early warning of future increases in the price level

Producer price index: an average of the [rices received by producers of g/s at all stages of the production process. - includes intermediate goods - increases in price of intermediate goods translate into higher prices to consumers

New Product Bias (CPI)

The basket of goods changes only every 10 years. There is a delay to including new goods like cell phones. new products' prices often decrease after their initial introduction, and the CPI is adjusted infrequently and overestimates the cost to consumers. The basket of goods used to change only every 10 years. (Now it updates every 2 years.) There is a delay to including new goods like cell phones.

Substitution Bias (CPI)

The inability of the CPI to account for consumers' substitution toward relatively cheaper goods and services The CPI uses fixed weights, so it cannot reflect consumers' ability to substitute toward goods whose relative prices have fallen. consumers may change their purchasing habits away from goods that have increased in price

effect labor unions have on unemployment rate

bargain with employers for higher wages and better working conditions

if the inflation rate increases from 4.25 to 5.5, and for example the interst rate of the loan is 5.75, then the real interest rate will decrease. Who are the winners and losers

borrowers gain from a lower real interest rate lenders lose from a lower real interest rate

unemployment insurance payments

decrease the opportunity cost of job search

lbor force participation rate

labour force / wap

how to calculate real average hourly wage

nominal average hourley wage / CPI1 x 100

real interest rate

nominal interest rate - inflation rate

The increase in quality bias CPI

quality improvements of goods and services are not filtered out completely and show up as an increase in the cost of living (inflation) difficult to separate improvement in quality from increase in price, say in cars or computers most products in the CPI increase in quality over time

real interest rate

the nominal interest rate minus the inflation rate

natural rate of unemployment

the normal rate of unemployment, consisting of frictional unemployment and structural unemployment

nominal interest rate

the stated interest rate on the loan

unemployment rate

unemployed/lbour force

your father earned in 34,000 in 1984, what is the equivalent to in 2014 if the CPI in 2014 is 215 and cpi in 1984 104

value in 2008 = value of 1984 x CPI 2014/CPI 1984