Econ 1120 prelim 1

Real GDP

Nominal GDP ÷ Deflator × 100

Base year rule

Deflator = 100 and Real GDP = Nominal GDP

Real GDP from a two-year table

That year's quantities × average of the two years' prices

Real growth shortcut

Nominal growth − Inflation

Inflation rate

(This year's index − Last year's index) ÷ Last year's index × 100

Divide by which number?

LAST year's index (not the base year)

CPI

Cost of base-year basket now ÷ Cost in base year × 100 (always base-year quantities)

Deflation vs disinflation

Deflation = prices falling (π < 0); Disinflation = prices rising more slowly

Commodity money

The money itself has value (gold coins / tobacco)

Commodity-backed money

Paper you can trade for gold or silver (US dollar before 1971)

Fiat money

Backed by nothing; government says it's money (US dollar today)

M1

Currency + checking deposits + savings deposits

M2

M1 + money market funds + small CDs

Not in M1 or M2

Credit cards

Actual inflation LOWER than expected

Lenders win; wealth moves from borrowers to lenders

Actual inflation HIGHER than expected

Borrowers win; wealth moves from lenders to borrowers

Why borrowers win when inflation is higher than expected

They repay with dollars worth less than everyone planned

Quota box goes to

Sellers

Price floor box goes to

Sellers

Price ceiling box goes to

Buyers

Tax box goes to

Government

High price helps

Sellers

Low price helps

Buyers

PS under ceiling

Triangle only

Tax revenue

Tax × Q