Macro Exam 2

The Fed's target level of inflation is
What was the CPI inflation in Jan. 2022?
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Terms in this set (41)
The Fed's target level of inflation is
What was the CPI inflation in Jan. 2022?
2%
7.5%
When you gathered the CPI data for Jan. 2022 from the BLS website, what items had become enormously more expensive from the previous year, by say 40%?
All types of gasoline and used cars and trucks
Rapid Inflation Fuels Debate Over What's to Blame: Pandemic or Policy, NYT, Jan. 22, 2022
aggregate demand > (is greater than) aggregate supply. That is, consumers want to purchase much more than companies can supply (even though the world produced a record amount of production).
According to the article, what are the three main explanations for why consumer spending is so high?
A. Government spending increased
B. Federal Reserve lowered interest rates
C. Shift in consumption due to the pandemic where people are spending more on goods instead of services
What main explanation has caused three reasons for why companies cannot supply enough, even though the world produced a record amount of production?
Main explanation: COVID virus
For: A. Factories shut down
B. Decrease in the number of ports due to blockages
C. Decrease in truckers available
PlanetMoney podcast: The Price of Lettuce In Brooklyn
What was the main point of the podcast?
To show how the BLS calculates headline CPI vs core CPI by having people like George go to stores and price things.
Headline CPI vs Core CPI
Headline CPI-everything they price
Core CPI-cutting out food and price of oil and things that fluctuate wildly to get more of a stable number
Basket cost formula
(qp)+(qp)
Compute index (formula)
basket cost in year x
-------------------------x 100
basket cost in base year
Compute inflation rate
period 2-period 1
------------------------x100
period 1
What items were in the market basket used to measure inflation in Massachusetts in 1780? Why were they motivated to measure inflation?Bushels of Corn Pounds of Beef Sheep wool Sole leather There was a hyper-fixation during the revolutionary war on increase in average prices, because people were going off to war and they were printing so much money, the value of the money soldiers get paid would be less when they returned from warWhy did I have a snowball in class?To illustrate the shrinking value of money with inflation. Inflation is like a snowball where the consumer's purchasing power melts away as the snowball melts. For example, $100 can shrink in value and the purchasing power will diminishThe steps involved in calculating inflation:establish consumption bundles Calculate each year's bundle costs Create price index numbers for different year's bundle costs Calculate inflation as the percent change in the index (such as the CPI)How to convert nominal to "real"?(nominal price in year x) (CPI base year ----------------- CPI year x)Explain how Pres. Biden and Bush each had a salary of $400,000. Whose salary has greater purchasing power today? Explain why.Bush has the greatest purchasing power of salary today and Biden has the least. They have the exact same salary in dollar amounts, but Bush's salary has more purchasing power today than Biden's does. The exact same amount of money with more inflation (Biden) means less purchasing power today.Why are your grandparents the people you know who are most aware of inflation over the last year?Because they were born during the great depression and so they are hyper aware of inflation levels because they do not want another issue like the great depression happening again and would fear that would happen with COVID.What is core-inflation? Why is it useful?Core-inflation is CPI but with the more volatile things taken out. This is useful because it is a better representation of the actual CPI and does not include outliers that can skew the dataThe textbook lists two eras of inflation—what are they? What is the third that has just been created?A. World Wars B. Mid 1970-80s, primarily due to oil prices C. Covid has created a third era.What are the four measure biases of inflation?A. Rural areas are excluded B. Substitution bias: if one item is too expensive consumers will just purchase another substitute C. Quality and new products are very difficult to incorporate D. True cost of a good is not what you actually pay (insurance co-pays)Explain why inflation is such a problem when it is unexpected and large.HIGHER INFLATION DISCOURAGES K, HK, AND T WHICH DECREASES ECONOMIC GROWTH-bad for opportunities, us economy, and for everyoneWhy does that reduce long run economic growth?bc it discourages K,HK,and TReal rate of interest formulanominal interest rate - inflation.During the Great Depression what happened to inflation and to the real rate of interest?During the great depression inflation skyrocketed and interest rates were dramatically lowered to try to get people to put more money in the banksIf inflation is unexpected and large, who is harmed and helped between you and your bank regarding your monthly mortgage payments of $1,000?You are helped and the bank is harmed, now they are paying you more money in interestIf deflation is unexpected and large, who is harmed and helped between you and your bank regarding your monthly mortgage payments of $1,000?The bank is helped and you are harmed, now you are paying more money in interest than you originally thoughtAgain, explain why unexpected and large average price changes are such a problem. Why does that reduce long run economic growth?Because the banks have to pay more money to people in interest than they previously thought and are not ready to pay this money. This way they have to come up with more money to give to consumers faster and sometimes have to go to extremes. This reduces long run economic growth because their money is used up faster than they planned and it will take them longer to get back to the desired economic position that they were in beforeAre jobs now plentiful or not?Jobs are now plentiful and payment is way up but consumers have higher oil prices and higher inflationWhat are the five components: GDPC (consumption) I (business investment) G (government spending) E (exports) X (imports)Say's Law is:Supply creates its own demandExplain the intuition behind Say's Law:Each time a good or service is produced and sold, it represents income that is earned from someone: a worker, manager, owner If every sale represents income to someone, a given level of supply must create an equivalent value of demand somewhere else in the economyDoes Say's Law emphasize aggregate supply (AS) or aggregate demand (AD)?Say's Law emphasized on aggregate supply because it is focused on the link between aggregate supply and the demand it stimulatesSay's Law seems "a good approximation for the what of the economy." what are these people called?long-run Economists who focus on the long run of the economy are referred to as neoclassical economists.What is aggregate demand (AD)?Aggregate demand is the combination of consumption, investment, government expenditures, and exports-imports that shows what is demanded by the consumers in an economyHow does the aggregate demand curve illustrate the relationship between the aggregate price level and the quantity of aggregate output demanded in the economy?The curve shows the level of aggregate expenditure for any price level as they are related by the line. For any given price level, the curve shows the corresponding output that the economy is demanding.What is aggregate supply (AS)?Aggregate supply is the measure of a businesses willingness to supply to the economyHow does the AS curve illustrate the relationship between the aggregate price level and the quantity of aggregate output demanded in the economy?The aggregate supply curve shows that lower output leads to lower prices, or in other words, how much an economy can possibly produce at each price level. For any given price level, the curve shows the corresponding output that the economy is able to supply.What causes both AS and AD to move along their curves?Changes in price level (overall price level changes)Consumption shifters: how do changes in these affect AD: Wealth Income Consumer Confidence Govt Assistance TaxesWealth ↓, AD ↓ Income ↑, AD ↑ Consumer confidence↓, AD ↓ Government assistance ↑, AD ↑ Taxes ↑, AD ↑Business I shifter: how do changes in these affect AD: GDP Growth Business confidence Tax credits for I Lending StandardsGDP growth ↑, AD ↑ Business confidence ↑, AD ↑ Tax credits for I ↑, AD ↑ Lending standards ↓, AD ↓AS shifters: how do changes in these affect AS: Input costs Productivity Exchange RatesInput costs ↑, AS↓ Productivity ↑ , AS ↑ Exchange rates ↑, AS ↑Why does Tim Taylor begin the chapter discussing weather extremes in Chicago?To show the idea of macroeconomics-understanding why small patterns occur is interesting, but macroeconomics is interested in looking at entire patterns of data over time