Studied by 3 people
price index shows
how the price of the market basket changes through time
consumer price index is the
average level of the prices of goods consumed by an urban family
cpi is published monthly by the
bureau of labor
step one of calculating the cpi
find the cost of the basket at base period prices
step two of calculating the cpi
find the cost of the basket at current period prices
step three in calculating the cpi
calculate the cpi for the current period
cpi equation is
basket in current year / basket at base prices x 100
the inflation rate is the
percentage change in price level from year to year
first stage of constructing the cpi
selecting the cpi basket
second stage of constructing the cpi
conducting a monthly price survey
third stage of constructing the cpi
using the prices and the basket to calculate the cpi
4 cpi biases
new goods bias, quality change bias, commodity substitution bias, outlet substitution bias
money illusion is
using nominal dollars rather than real dollars to gauge income or wealth
the inflation formula is
(cpi this year - cpi last year) / cpi last year x 100
pure inflation is when
prices of all goods rise by the same percentage over the year
hyperinflation is an
extremely rapid inflation rate with devastating impact
disinflation
declining inflation rate
deflation
rate of downward movement in price level
two sources of pressure on the price level and inflation
demand pull and cost push
demand pull inflation starts because
aggregate demand increases by any factor
cost push inflation results from
an initial increase in resource costs
cost push inflation occurs when AS shifts
left
cost push inflation is
self limiting
self limiting means it will
die out or cure itself
stagflation is the combination of a
rise in price level and drop in real GDP
purchasing power
measure of how much dollar can buy
nominal income
actual number of dollars received over a year
real income
purchasing power of nominal income
inflation does what to borrowers, including the government
helps them
inflation does what to real income
redistributes it
2 main effects of inflation are
redistribution of income and departure from full employment
the nominal interest rate is the price a borrower pays for
the amount loaned and the devaluing of the money
the real interest rate is the
price paid by a borrower to compensate only for the amount loaned
the core inflation rate attempts to
reveal the underlying inflation trend
rational expectation is
the forecast that is based on all relevant information
recession is a period during which
real gdp decreases for at least 2 successive quarters
deflation
falling price level
the phillips curve shows the relationship between
inflation and unemployment
two types of phillips curves
short run and long run
the phillips curve seeks
price level stability
in the phillips cure, the rate of inflation and unemployment are
inversely related
4 phases of the business cycle
peak, trough, recession, expansion
a peak is when the economy is
at full employment and highest level of real gdp
recession is when real gdp
decreases
trough is where real domestic output and unemployment
bottom out at lowest levels
expansion is a period during which
real gdp increases
secular trend
expansion or contraction over a long period of time
the population is divided into two groups
the working age population and people too young to work or in institutional care
the working age population consists of
people aged 16 or older who are not in jail, hospital, or institutional care
the working age population is divided into two groups
people in the labor force and people not in the labor force
the labor force is the sum of
employed and unemployed workers
labor force is the number of people who are
over 16 and employed or actively seeking a job
job separation
when a worker quits or is fired or is laid off
job search
process of looking for a job
job finding
when unemployed worker accepts new job
entrants
people who are entering the labor force
reentrants
people who have previously withdrawn from the labor force
the unemployment rate is the percentage of people
in the labor force who are unemployed
equation for unemployment rate
number of people employed / labor force x 100
marginally attached worker
a person who is neither working nor looking for a job but has indicated that they want and are available for a job and has looked for work in the past
discourage worker
a marginally attached worker who has stopped looking after repeated failure
the labor force participation rate is the percentage of
the working age populating who are members of the labor force
equation for labor force participation rate
labor force / working age population x 100
employment to population ratio is the percentage of
people of working age who have jobs
equation for employment to population ratio
number of people employed / working age population x 100
aggregate hours
total hours worked by all people employed during a year
real wage rate
quantity of goods that can be purchased with an hour’s work
three types of unemployment
frictional, structural, cyclical
frictional unemployment arises from
people entering and leaving the labor force and the creation and destruction of jobs
frictional unemployment increases when
more people enter the labor market or when unemployment compensation payments increase
structural unemployment arises when
changes in technology or change in skills or location necessary for a job
cyclical unemployment arises from
fluctuations in the business cycle
cyclical unemployment increases during a
recession
cyclical unemployment decreases during an
expansion
is cyclical unemployment included in the natural rate of unemployment?
no
full employment
unemployment rate = natural rate of unemployment
classical theory believes the the economy is
self regulating and always at full employment
in classical theory, government interference
is not needed
classical theory takes which viewpoint
long run
in classical theory, the most significant influence on both AD and AS is
technological change
in classical theory, taxes
blunt people’s incentives to work
say’s law states that
supply creates it own demand
say’s law states that overproduction
is not possible
Keynesian theory is based on the
herd instincts
in the keynesian theory, when the economy is left alone
it would operate at full employment
K theory says that to achieve and maintain full employment
fiscal and monetary policy is required
fiscal policy
help from the government
monetary policy
help from the central bank
in keynesian theory, money wages are
sticky, especially downward
monetarist theory says the economy is
self regulating and will normally operate at full employment
monetarist theory says the most significant influence on AD is
the quantity of money
in monetarist theory, all recessions result from
inappropriate monetary policy
in monetarist theory, tax rates should
be kept low
real business cycle theory states the main source of economic fluctuations are
random fluctuations in productivity and resource availability
RBC cycles are just variations in growth because of
change of pace in technology change
other sources of changes in rates in RBC are
international disturbances, climate fluctuations, natural disasters
theory of creative destruction
monopolies are destroyed by new industries
theory of contestable markets
there are barriers to enter
in the theory of contestable markets, there is difficulty
switching resources
theory of creative destruction is basically: “if you don’t
change, you will die
Note 
Flashcard (187)