Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Economics: Principles and Applications, 2e by Robert E. Hall & Marc Lieberman © 2001 South-Western, a division of Thomson Learning The Monetary System, Prices, and Inflation © 2001 South-Western, a division of Thomson Learning The Monetary System •History of the Dollar •Why Paper Currency Is Accepted as a Means of Payment © 2001 South-Western, a division of Thomson Learning The Monetary System Unit of Value A common unit for measuring how much something is worth. Means of Payment Anything acceptable as payment for goods and services. © 2001 South-Western, a division of Thomson Learning The Monetary System In 1790, Congress created a new unit of value called the dollar. © 2001 South-Western, a division of Thomson Learning The Monetary System Federal Reserve System The central bank and national monetary authority of the United States. © 2001 South-Western, a division of Thomson Learning The Monetary System The earliest means of payment were precious metals and other valuable commodities such as furs or jewels. These were called commodity money. © 2001 South-Western, a division of Thomson Learning The Monetary System Fiat Money Anything that serves as a means of payment by government declaration. © 2001 South-Western, a division of Thomson Learning The Monetary System The real force behind the dollar--and the reason that we are all willing to accept these green pieces of paper as payment--is its longstanding acceptability by others. © 2001 South-Western, a division of Thomson Learning Measuring the Price Level and Inflation •Index Numbers •The Consumer Price Index •How the CPI Has Behaved •From Price Index to Inflation Rate •How the CPI Is Used •Real Variables and Adjustment for Inflation •Inflation and the Measurement of Real GDP © 2001 South-Western, a division of Thomson Learning Measuring the Price Level and Inflation Price Level The average level of dollar prices in the economy. © 2001 South-Western, a division of Thomson Learning Measuring the Price Level and Inflation Index A series of numbers used to track a variable’s rise or fall over time. © 2001 South-Western, a division of Thomson Learning Measuring the Price Level and Inflation Consumer Price Index (CPI) An index of the cost, through time, of a fixed market basket of goods purchased by a typical household in some base period. © 2001 South-Western, a division of Thomson Learning Measuring the Price Level and Inflation Inflation Rate The percent change in the price level from one period to the next. Deflation A decrease in the price level from one period to the next. © 2001 South-Western, a division of Thomson Learning Measuring the Price Level and Inflation The CPI is used in three major ways: •As a Policy Target •To Index Payments •To Translate from Nominal to Real Values © 2001 South-Western, a division of Thomson Learning Measuring the Price Level and Inflation Indexation Adjusting the value of some nominal payment in proportion to a price index, in order to keep the real payment unchanged. © 2001 South-Western, a division of Thomson Learning Measuring the Price Level and Inflation Nominal Variable A variable measured in current dollars. Real Variable A variable measured in terms of purchasing power. © 2001 South-Western, a division of Thomson Learning Measuring the Price Level and Inflation When we measure changes in the macroeconomy, we usually care not about the number of dollars we are counting, but the purchasing power those dollars represent. We translate nominal values into real values. © 2001 South-Western, a division of Thomson Learning Measuring the Price Level and Inflation GDP Price Index An index of the price level for all final goods and services included in GDP. © 2001 South-Western, a division of Thomson Learning Measuring the Price Level and Inflation The GDP price index measures the prices of all goods and services that are included in U.S. GDP, while the CPI measures the prices of all goods and services bought by U.S. households. © 2001 South-Western, a division of Thomson Learning The Costs of Inflation •The Inflation Myth •The Redistributive Cost of Inflation •The Resource Cost of Inflation © 2001 South-Western, a division of Thomson Learning The Costs of Inflation Inflation can redistribute purchasing power from one group to another, but it cannot--by itself--decrease the average real income in the economy. © 2001 South-Western, a division of Thomson Learning The Costs of Inflation Inflation can shift purchasing power away from those who are awaiting future payments specified in dollars and toward those who are obligated to make such payments. © 2001 South-Western, a division of Thomson Learning The Costs of Inflation Over any period, the percentage change in a real value is approximately equal to the percentage change in the associated nominal value minus the rate of inflation. © 2001 South-Western, a division of Thomson Learning The Costs of Inflation If inflation is fully anticipated, and if both parties take it into account, then inflation will not redistribute purchasing power. © 2001 South-Western, a division of Thomson Learning The Costs of Inflation Nominal Interest Rate The annual percent increase in a lender’s dollars from making a loan. Real Interest Rate The annual percentage increase in a lender’s purchasing power from making a loan. © 2001 South-Western, a division of Thomson Learning The Costs of Inflation When inflationary expectations are inaccurate, purchasing power is shifted between those obliged to make future payments and those waiting to be paid. An inflation rate higher than expected harms those awaiting payment and benefits the payers; an inflation rate lower than expected harms the payers and benefits those awaiting payment. © 2001 South-Western, a division of Thomson Learning The Costs of Inflation When people must spend time and other resources coping with inflation, they pay an opportunity cost-they sacrifice the goods and services those resources could have produced instead. © 2001 South-Western, a division of Thomson Learning