Econ 104 Professor Dr Bill Goffe Quiz 2 Ch 8 Ch 9 4 9 7 Major Topics Fiscal Monetary Policy GDP Deflator o GDP Deflator Inflation Consumer Price Index CPI o Core Rate of Inflation o GDP Deflator vs CPI o Inflation vs Price Level Real Prices o Subtraction Method o Division Method o Deflating Method Articles o America is Slipping to No 2 Don t Panic o Inflation Slows Amid Plunge in Oil o Job and Wage Gain as Americans Rejoin the Work Force Fiscal Policy Directed by the President and Congress Purpose Increase government expenditures and cut taxes o This way spending and transfers increase while consumption and investment stay constant Monetary Policy Directed by the U S Federal Reserve Key Positions are appoint by President AND confirmed by the Senate Purpose Cut interests rates in order to fuel consumption and investment o This process is aided by the financial system Uses nominal GDP and real GDP to measure price level o Price level average price of all goods and services in an economy GDP Deflator Equation o GDP nominal GDP x 100 real GDP GDP Deflator is a price index GDP Deflator Inflation o Inflation o Equation Inflation the percent change in the price index this is similar to the GDP deflator o Economic growth is measured by inflation similar to measuring it with GDP o Highest inflation recorded was in the 1970s o Deflation o Disinflation a fall in prices less inflation Consumer Price Index CPI CPI is used to remove inflation from nominal prices and wages The ratio of expenditures on the market for a consumer in one month compared to the arbitrary base period multiplied by 100 CPI is not in terms of dollars o Actual CPI weights Housing 24 Housing other 17 1 Transportation 16 9 Education communication 6 8 Food beverages 15 3 Apparel 3 6 Recreation 6 Other goods services 3 4 Core Rate of Inflation o Measures inflation without food and energy prices included unlike normal CPI o Food and energy prices can change often and be unexpected Natural causes such as droughts can implement change in the food industry o The world oil supply has increased 40 due to fracking GDP Deflator vs CPI o Both measure price level GDP Deflator price level for whole economy CPI price level for consumers Inflation vs Price Level o Difference between disinflation and deflation CPI deals with disinflation a fall in prices Inflation deals with deflation less inflation Real Prices There are 3 methods to solve real prices o Subtraction o Division o Deflating Subtraction Division Deflating Equation Percent change real price percent change nominal price inflation rate Converts a nominal price from one periods price to another periods price Equation old nominal price x new CPI old CPI OR new nominal price x old CPI new CPI Division and subtraction methods provide the same results Equation new nominal price new CPI old CPI OR old nominal price old CPI new CPI Articles America is Slipping to No 2 Don t Panic o China s GDP will pass U S s by 2017 predicted but their GDP per capita will stay behind for decades to come o Negatives o Positives Dollar power in the U S might decline if America is surpassed Borrowing and Exporting costs will increase It was be difficult to maintain the largest defense budget Other economies are becoming larger healthier more educated more free and less violent This will lead to more jobs in the U S dealing with exporting and importing More inventions and innovations will help the global world There will be more travel in countries for leisure education healthcare and work Inflation Slows Amid Plunge in Oil o Consumer prices inflation rose just 0 8 over the last year o The decline in gas prices will push inflation into negative territory o Core prices food and energy rose 1 6 o The Federal Reserve looks at core prices when setting interest rates to monitor if its shifts are affecting consumer price gains o Interests rates are expected to raise in the coming year o The U S compared to Europe is in better shape Europe has sluggish inflation Job and Wage Gain as Americans Rejoin the Work Force o Wage growth rebounded and more people are moving towards the work force o 260 000 jobs were added in January and the unemployment rate is now 5 7 o The minor increase in the unemployment rate was due to Americans being encouraged enough by their job prospects to look for good work o Real Wage Old Wage x New CPI Old CPI o The Fed will most likely increase short term interests rates in June o There was a slower than expected 2 6 rate in economic output in the fourth quarter