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21 Cards in this Set
- Front
- Back
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Equation for Inflation |
Pi t = (Pt - Pt_1 / Pt_1) * 100 |
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Equation for Consumer Price Index (CPI) |
CPI t = (Basket Cost t / Basket Cost b) *100 |
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Problems caused by Inflation #1 |
1. Shoeleather costs - changes in behavior 2. Money Illusion - Nominal wages increase but real wages stay the same 3. Menu Costs - Changing prices can be costly |
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Problems caused by Inflation #2 |
4. Uncertainty of future prices 5. Price Confusion - Makes people wonder why prices are rising 6. Lending and Borrowing Costs - Ex: friend borrows dollar and isn't worth as much as it is in the future when he pays back
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Bias in CPI |
1. Outlet Bias - Shopping at other places where the product is cheaper and not at full price 2. Substitution Bias - As prices go up we switch products for cheaper goods (Overestimates) 3. New Product Bias - Ex: Laptop to tablet comparison 4. Increase in Quality Bias (Overstates) |
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Dollars today to Dollars in past Equation |
Dollars Today = Dollars in Past * Price Today / Price in Past |
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3 Roles of Financial System |
1. Spreading Risk Ex: Lending risks and trust 2. Provides Liquidity Ex: Cash is very liquid, houses are not 3. Provides Information Ex: Prices, updates info |
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What do investments and savings equal? |
I and S = y (GDP) - C (Consumption) - G (Government Spending) |
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Who is on the Supply Curve and who is on the Demand Curve? |
On the supply curve are the savings Ex: Households, Government On the demand curve is the borrowers Ex: Firms |
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Factors that shift the supply curve |
1. Income and Wealth (+) shifts right 2. Time Preferences (Limits your consumption at the time) (-) shifts left. Ex: PS4 bought instead of saving 3. Government Spending/Saving (+) shifts right |
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Factors that shift the demand curve |
1. Productivity of Capital (+) shifts right 2. Investor Confidence (+) shifts right |
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When government spending increases, interest rates increase, and investments decrease what is that called? |
Crowding Out |
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Calculate Real Price |
Price/CPI |
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When expected inflation is greater than inflation |
The interest rate is higher than the expected interest rate. Lenders win, borrowers lose |
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When inflation equals expected inflation |
The interest rate is equal to the expected interest rate. Borrowers and Lenders win |
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When inflation is greater than expected inflation |
The interest rate is lower than the expected interest rate. Borrowers win, lenders lose |
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How to calculate the nominal interest rate |
(Original Money borrowed w/ interest - original money borrowed) / money borrowed |
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How to find the real interest rate |
r = i (nominal interest rate) - pi (inflation) |
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Expected Inflation Equation |
(CPIe - CPIt) / CPIt-1 x 100 |
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Inflation Equation with CPI |
(CPIt - CPIt-1) / CPIt-1 x 100 |
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Price Level |
The average price of goods and services in the economy |
