ECON 202 Ch. 9 Unemployment and Inflation
ECON 202 Ch. 9 Unemployment and Inflation Econ 202
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This page Class Notes was uploaded by Hannah Leggett on Tuesday February 9, 2016. The Class Notes belongs to Econ 202 at University of Kentucky taught by Mr. Gillette in Spring 2016. Since its upload, it has received 56 views. For similar materials see Introductory Microeconomics in Economcs at University of Kentucky.
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Date Created: 02/09/16
1292016 Ch 9 Unemployment andln a on The percentage increase change in the price level from one year to the next Need a Price Index to Measure the Price Level 4 ituvvrqugs LAbU A r Consumer Price Index CPI d1 EIWMeasurt j of the price level calculated by dividing nominal GDP by real GDP amp multiplying by 100 lncludes all final goods 8L Pei 9Y0 7 U2 In An average of the prices received by producers of goods 81 services at all stages of the production process Measure of the price level that is Isimilar to the G P deflator except in includes only the prices of goods from the consumption category of GDP Pomonal bonsump oh apem3 Price 6 tnrfcle 1292016 AK Consumer Price Index CPI tr wasme Meia131 aw1 UG QWLLQ y 39 A measure of the average change over time in the prices a typicai urban family of four pays for the goods and services they purchase 39 Costof i the index CPI Market Basket 8 CH Formula Market Basket t If 211 different type 3 our 7 group of oods 8 services urcmase 7y t e typica urban family of WW NE aWL WVESon Market Basket in Current Year 2015 y r i G I CPI2015 r 7 7 x 100 Qmjlvua39 EXQWJAWVBL on Market Basket in Base Year 39 An index C39fi m39lparing the cost of bu amp services in the 39 i a markets as at yihg the market basket of goods to the cost of buying that r quot0d Interpreting the Value of the CPI 39 The CPI is the cost of the market basket in a specific year AS CL Lofthe cost ofthe same market basket in the base year 39 A CPI of 110 indicates that the costs of the market basket is M Q percent of the baseyear costs or that the cost have increased Q percent 39 Interpret CPIDECEWIber 2015 237 8 CP I1953305 been Period is BL 357 Tlru 005k 09 living has in wetAm H s Gill is NOT M SW 6L llamaHaw Calculating the In ation Rate 39 Cplzols Cpl om Inflation Rate2015 x 100 CPM2O14 39 Briefly explain whether you agree or disagree with the following statement quotI don t believe the government price statistics The CPI for 2010 was 218 but I know that the inflation rate couldn t have been as high as 118 percent in 2010 N eel CPt Gov 200 39 Tle CPI in More is cgoimd Up We Inav0 Weeviewucl IntactHorn 0cm Lamahome 1292016 fatsas ln atlon Rate 1960 2015 Below Target Rate Now 2455 Consumer Price index for at Urban Consumers Ml Itsms Equot I l g 15 r a i4 VWFM 00 i r l 7 r I 3 l 39i 9512 193 1930 135111 2900 2010 Sourcezfds Bureau of ioi oor 51 tist cs k7 researchstlouisfedorg rrwftredfgf tlwx WW I A r a J I V Wquot CPI Overstates the Cost of Living amp Inflation Rate Substitution Bias Using a f we market basket the CPI assumes that consumers do not buy legs g of a good whose relative price rises amp m luvwof a good whose relative price falls 0 Increase in Quality Bias QUM l improvements of goods 81 services are not 9V filtered M completelySt Show up as an ihggzag g DMqh 1 UN L In the cost of I wlng Inflation v Slru 4 s l 39 Omit New Product BiasELOutlet Bias JD 44 1292016 Using Price Indexes to Adjust for the Effects of Inflation 39 Variables that are calculated in current year prices are L 1 1 referred to as variables mob yariable by a S7rlU W to obtain a real variable For example 0 1 145 Nominal Wage melamwue Realwagez m an referred to as constant dollars The real variable will be measured in dollars ofthe 39 To correct for the effects of inflation divide the nominal and multiply by 100 CH CONSUW gnu ihw haw aw Fonal Minimum Wago lNllec W how 4 l1er m Interest Rates Nominal vs Real 3 percentage of the amount borrowed 39 Nominal Interest Rate 39 Stated interest rate on a loan return from lending rate is 8 39 Calculate the Nominal 8L Real lnterest Rate You borrow 1000 for one year amp at the end of the year you repay the 1000 plus 100 of interest 81 the inflation The interest rate is the cost of borrowing funds expressed as quot Real interest Rate R 39 Nominal interest rate in my the in M i n rate gt Better measure of the m or cost of borrowing 8 the lru ham ex Viol s l 3 RM MiaLS wailnal inkVestquot ireH inmm39om rm 39NUWHM InletHie W a hoot lni weu t i nhMwo l 93quot eatercl 5 2 33 2016 Nominal lnterest Rate Real interest rate Expected lnflation rate 39 ls it possible for the nominal interest rate to be less than the real interest rate jag buy expatHA t hHah39ok VatLo musk be M wHVt De wh39l F v 39 Why Inflation Is a Problem 0 I Wrong Reason r uw on 1 up 3 lt lncreasesthe Cost of Living but Not Nominal Incomes 0 W From circular flow of expenditures 8L income total output total expenditures total income Suppose inflation raises the cost of running shoes from 150 to 300 what happens to income 39 Inflation raises in general both the OU39 O amp M qu IVLUO W5 New or 07 was LawnHm Problem with Unanticipated In ation shri louicSincome between borrowers amp 3F lenders when actual inflation rate dd egg from expected inflation rate 39 Nominal interest rate 2 Real interest rate Expected inflation rate 725 Real interest rate Nominal interest rate Inflation rate 2 7 5 Actual inflation lt Expected Inflation Lenders E wig Borrowers boob Suppose actual inflation 0 instead of 5 Actual real interest rate Nominal interest rate actual inflation rate i to 7 o Lenders receive amp borrowers pay a nominal interest rate 7 with an expected inflation rate 5 larger than the actual in ation rate 0 that occurs thereby lenders receive 8 borrowers pay an actual real interest rate larger than the expected real interest rate Q 1E29f2016 1292016 Actual In ation gt Expected lnflation Lenders LORI Borrowers 63mm Suppose actual in ation 10 instead of 5 Actual real interest rate Nominal interest rate actual in ation rate D 39 3 a7e10 Borrowers gain by paying a nominal interest rate with an expected inflation rate 5 smaller than the actual inflation rate 10 that occurs thereby paying an actual real interest rate L lu smaller than the expected real interest rate 35 39 Sampl Crisis of the late 19805 gum Ljuu Wow I juum m lowVoww or Unanticipated inflation Multiple Choice Question Suppose you borrow 1000 at an interest rate of 5 If the expected real interest rate is 2 then the rate of inflation over the upcoming year that would be most beneficial to you would be a rate ofinflation 39 8 equal to 2 V greater than 3 N ow M c equalto 0 010 0 39 d equal to 3 24M l nm l Nomi 2 75 0 lo m lavLAW Leal interest 1 mercury 376 37a 1292016 Problems with Deflation L y M aA re Consumers reduce consumption spending waiting for even owev prices Increases the burden on borrowers if the de ation is unexpected because it 3 7 the V39er interest rate I 39 Real interest rate Nominal interest rate In ation Rate h whta w To Do Well 39 Using my powerpoint notes as a guide read Chapter 9 MyEconLab Ch 9 Study Plan Questions M WWMWW 39c oa m I MULun39h UWQW jW fixquot Mug MixM j OOWW b0 ops z gloz ci quot39 Wwcm v 5 m UWVIQWUW W E7 LUWWVWUWWI WW xloO quot39 MMsUNwwm emng L CUIAAW DiscouvmoyA Wonav l hawtun I39mM3 Pam L I OwV Maxim uwzWt l A 1 7 r 39 v 0 W jaw Qw jwwm 951MB m m 0va W Mead V DQSWVVhblx 2539 w mm o 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