Download Macroeconomics

MACRO
Unit 4: Price Stability and
Inflation
Economics
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.
This work is licensed under
the Creative Commons
Attribution-NonCommercial
License
MACRO
Economics
Society's Goals for Macro System

Growth

Stable Prices & Money
Full Employment
 Stability of Business Cycle

MACRO
Economics
Money: an elastic measuring stick
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MACRO
Economics
Inflation is a sustained and
generalized increase in most
prices.
 Money loses real value
 Most observed (nominal)
prices are rising
MACRO
Economics
The Inflation Rate is the % change
(annual rate) in most prices as
measured by a price index.
MACRO
Economics
Deflation is a generalized decrease in
most prices.
MACRO
Economics
Disinflation is a reduction in the rate of
inflation.
MACRO
Economics
Terms:
- Nominal Prices: actually observed
- Real Values: estimated value of
goods using “base year” prices.
MACRO
Economics
Inflation erodes financial wealth
and fixed incomes.
MACRO
Economics
But inflation also helps debtors and
owners of real wealth.
MACRO
Economics
Hyper-inflation Can Destroy.
MACRO
Economics
Deflation Is Very Undesirable (any
amount of deflation)
MACRO
Economics
Practical Policy Goal:
Low, stable inflation.
MACRO
Economics
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
MACRO
Economics
Measuring Inflation Rate requires a
price index.
MACRO
Economics
A price index establishes price
levels relative to an arbitrary
“base year”.
MACRO
Economics
Price Index: wtd average of prices
based upon comparing the cost of
“market basket” of goods each year.
MACRO
Economics
Inflation Rate = percentage
increase from year-to-year in price
index
MACRO
Economics
There are a lot of different price
indices such as CPI, GDP Deflator, PPI,
and Billion Prices Project.
MACRO
Economics
Price indices are imprecise due to
quality changes, new products, and
shifts in preferences.
MACRO
Economics
Inflation needs “momentum”, not
just isolated increases. Attempts
to measure it use “core inflation”.
MACRO
Economics
What causes inflation? More demand
in general than supply.
MACRO
Economics
Nominal Interest Rates include a “real
rate” component and an
implied/assumed future inflation rate.