Macroeconomics Chapter 12- Inflation
Macroeconomics Chapter 12- Inflation Econ 2120
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This 4 page Class Notes was uploaded by Maggie Wehunt on Wednesday September 30, 2015. The Class Notes belongs to Econ 2120 at Clemson University taught by Kelsey Roberts in Summer 2015. Since its upload, it has received 31 views. For similar materials see Principles of Macroeconomics in Economcs at Clemson University.
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Date Created: 09/30/15
Chapter 12 In ann Increase in the average level of prices in general if prices are rising Reduces purchasing power of the dollar In ation pi 0 Pi P2P1P1 x 100 Hvberin ation extremely high levels of in ation 0 Germany after WWI you owe so much money to a bunch of countries so Germany just printed a bunch of bills Why does it cause problems 0 Unexpected in ation don39t know what the future holds 0 Wage contract if you don39t know how much in ation will be in the future then don39t know how much you should request to have De ation negative in ation decrease in the average level of prices 0 Measures by price indexes Disin ation a reduction in the in ation rate 0 Still going to have positive in ation it is just increasing slower 0 Example Year1100 Year2110 Year3112 P celndex o CPI Consumer Price Index Most common price index Anything calculated in real terms real GDP It takes about 80000 goods and tracks how prices change Anything average person would purchase Apply weights to prices how much money you would spend on it Price of houses and cars weighted heavily because if the price of houses and cars doubled it would affect more than if the price of baseball hats doubled Accounts for geographic in ation NY housing vs North Dakota housing CPIbePcbePbx100 0 GDP de ator All goods included in GDP Different than CPI just common goods GDP de ator nominal GDP Real GDP 0 PPI average price Intermediate goods and nal goods Separates the market by industries Prices in automotive industry are rising vs textile industry Whether your industry is facing higher prices or if everyone is facing higher prices Overestimates CPI 1 Substitution a Cat food prices go up switch to another brand of cat food Purina Purina isn39t counted in CPI so overestimates Quality changes a Is price rising because you39re getting a better quality good or is price rising because all prices are rising b Must consider quality when talking about price falls prices are falling but you see higher quality in goods E at screens were 7000 in 80 s and 500 now c Getting more for what you pay for but don39t know how much is increase in price or increase in quality New goods and locations a IPod when rst came out wasn t typicaI consumer goods b CPI onIy caught price effect only when was a common good c Anything that comes out new usually technology d Original price drop is not included so overestimates Chained CPI stiII overestimates it but updates it so overestimates less normal CPI is yearly where chained CPI is monthly Real price why CPI is used Price that is adjusted for in ation Year Price CPI 1982 125gal 100 2006 250ga 202 Takes just as many resources to buy a gallon of gas in 2006 than in 1982 real price hasn39t changed much 125 202100 253 Now gas is essentially 3 cents less in terms of real price than it would have been in 1982 P old old Price new new Problems with In ation 1 quotShoe leather costsquot a Any resources that are wasted with people change their behavior to avoid holding money b Time you waste when moving money from savings to checking c Gas you waste going to ATM to get money out 2 Menu Costs a Costs of physically changing prices b You don39t know if people want your actual goods or if they are eating because you are behind on in ation and have very cheap prices c Cost of having to reprint that menu with cost changes easy with gas stations or McDonalds because they can just ip numbers digitaIIy d Discourages people from changing prices because is costly to reprint menus 3 Money illusion a When people interpret a nominal change as a real change b 10 raise in pay and takes on higher mortgage payment but then realizes prices in general went up 10 has a higher mortgage payment but the same real salary c Could give 1 raise but in ation is 3 D technically lowering pay by 2 4 Uncertainty about future price a Don t know what proper interest rate is in ation is high then is volatile is harder to longterm contract so people don39t know what the in ation rate will be so people will invest less which is worse for rms 5 Price confusion a If you don39t know in real terms how much value something actually has same idea as money illusion 6 Wealth Redistribution a Biggest problem with in ation causes the most problems b R actual nominal in ation i Actual real rate of return ii If go to bank and get CD give you 2 interest rate but if prices rise 1 technically you39re only 1 better off c Fisher Effect tendency for nominal interest rates to rise with expected in a on i If you expect 3 in ation you will start charging more so you can still have a positive actual rate of return ii If expect in ation to go up the actual rate is expected to go up Fisher Effect E in ation expected in ation R eq equilibrium real rate r actual r eq unexpected in ation E in ation lt in ation r actual lt r eq harm lender and bene t borrowers redistribute wealth from lenders to borrowers Unexpected disin ation E in ation gt in ation R actual gt real equilibrium Bene t lenders and harm borrowers Expected actual E in ation R actual r equilibrium No wealth redistribution Hardly ever fall into category 7 Tax distortions a Tax nominal capital gains Year Price CPI 1980 80000 80 2012 230000 230 Real Gain gt tax rate nominal gain Must be true for you to actually be better off rarely ever true Nominal gain is 150000 0 Real gain is 0 Why does in ation happen 0 Once you put money in the market example lower interest rates there is too much money chasing too few goods so business has to raise prices which causes in ation
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