Week 6 lecture notes - Macroeconomics
Week 6 lecture notes - Macroeconomics ECON 2105 080
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This 3 page Class Notes was uploaded by Gunawork on Monday October 5, 2015. The Class Notes belongs to ECON 2105 080 at Georgia State University taught by Brian Hunt in Fall 2015. Since its upload, it has received 38 views. For similar materials see PRINCIPLES OF MACROECONOMICS in Economcs at Georgia State University.
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Date Created: 10/05/15
MacroEcon 2105 Week 6 Lecture Notes Chapter 8 Price Level and In ation continues Simple Price Index Index gives and idea of the overall in ation in the economy Base period CPI 100 Demand and supply driven Trade protection Calculating a Simple Price Index 2013 2014 Good Quantity Price Cost Price Cost Popcorn 2 4 8 6 12 Limeade 2 4 8 4 8 Movie ticket 1 8 7 8 10 10 Basket Price 24 30 Index EPI 24 30 x 100 100 24 Equation to nd the Price Index x100 125 24 Price index basket price basket price in base year x 100 Finding price levels we can nd in ation by using a percentage change formula In ation rate i 125 100 100 X 100 25 Prices DO NOT all move together Travel education health care Concerns about CPI accuracy Substitution Change in equality New products and locations new goods and services and locations Cost of in ation Shoeleather cost effort it takes to do something As prices go up it becomes more costly to hold money Shoeleather costs are resources that are wasted when people change behavior to avoid holding money Time effort and fuel costs that people bear when they try to use more money Money illusion People interpreting nominal wage or price changes as 211 changes If prices wages all go up by 2 there is no gal change in your purchasing power People with money illusion think they are richer in this case Nominal wage The wage in current dollars analogous to nominal GDP Real wage Nominal wage adjusted for in ation changes in the price level Another money illusion example If nominal wages go up by 3 but prices go up by 5 money illusion may cause you to think of yourself as wealthier but your real wages have actually decreased Menu costs The costs of changing prices Example a restaurant will have to print new menus for all price changes Uncertainty about future price levels Wage and other input contracts often have a longterm commitment Firms may have to borrow today and pay back the money later Uncertainty about prices may make borrowing riskier In ation and logterm agreements Prepareto hrherea39 3 value of these 39 Prod ce Sell Out I 2 PFOduce U W future dollars depends on Borrow 53 Re a Loans 5 lin ation Build Capital Goods p y c x 1 Hire Workers Pay workers D l I Today Future Time Pe ods Costs of in ation In ation creates wealth in redistribution Wealth redistribution Wealth can be redistributed between borrowers and lenders 0 Borrowing future Price confusion What s causing the price to rise Dif culty analyzing price changes as a result of demand shifts or in ation Implications are very different mcrease in Buy New Resources Demand Build Factory Increase Hure Workers gt Output Price Other resources Increase Don t Change Output In ation All prices affected Tax distortions Capital gains taxes are taxes on the gains realized by selling an asset for more than its purchase price Problem often the price rises due to in ation rather than an increase in the value of the good Example Buy a house in 1980 for 80000 Sell the house in 2012 for 230000 for a 150000 capital gain You have to pay taxes on this 150000 However the CPI rose from 80 to 230 in those years so the real value of the house is the same Using CPI to compare dollar values across time Prices from different time periods can be confusing In 1924 you could buy a fully constructed house for 1969 To compare we can transform this into a price in today s dollars Price Level To day Price Today Price Earlier x o Pr1ce Level Earl1er