EC202 1nd Edition Lecture 14Outline of Last Lecture I. IndexingOutline of Current Lecture II. Accuracy of CPIIII. Price levelIV. Relative priceV. Costs of inflationVI. Real and nominal interest ratesCurrent Lecture-accuracy of CPI-changes in CPI directly effect government budgets-CPI overstates inflation between 1 and 2 % per year-underestimates true living standard-cost government billions of dollars-price level: a measure of the overall level of prices as measured by a price index (such as CPI)-relative price: the price of a specific good or service in comparison to the price of others-changes in relative price allocate scarce resources-this provides signal for production-costs of inflation-unexpected redistribution of wealth-inflation is higher than expected-interference with long run planning-it is difficult to predict prices over a long period of timeThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.-reduces efficiency of the economy-uncertainty costs-high inflation rates bring increased uncertainty about the long term inflation rate-increased uncertainty also misallocates resources-gains and losses occur because of unpredictable changes in the value of money-real interest rate: the annual percentage increase in the purchasing power of a financial asset or of a return on a loan-nominal interest rate: the observed market interest rate on a loan expressed in current dollars; the annual percentage increase in the nominal value of a financial
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