Econ Test #2 Study

  1. Nominal GDP
    Value output using current prices

    Not corrected for inflation
  2. Real GDP
    Value out using prices of a base year

    Is corrected for inflation
  3. GDP Deflator
    • Nominal GDP * 100
    •   Real GDP

    Measure of overall level of prices
  4. Consumer price index (CPI)
    Measures the typical consumers price of living
  5. How is inflation rate calculated?
    • CPI in current yr - CPI in base yr * 100
    •            CPI in base yr
  6. How is CPI calculated?
    • Cost of basket in current year * 100
    • Cost of basket in base year
  7. Problems in CPI
    Substitution bias

    Introduction of new goods

    Unmeasured quality change
  8. When is a dollar amount indexed?
    If it is automatically corrected for inflation by law or in a contract
  9. How to compare dollar amounts from different years
    Amount in today's dollars = Amount in T year * Price level today/Price level in T year
  10. Two sources of inflation
    Increase in aggregate demand

    Decrease in aggregate supply
  11. Anticipated Inflation
    What people expect to happen to the price level in the coming years
  12. If inflation > Expected
    • Lenders lose,
    • Borrowers gain
  13. If inflation < Expected
    • Lenders gain
    • Borrowers lose
  14. Nominal Interest Rates
    • The interest rate not corrected for inflation
    • The rate of growth in the value of a deposit of debt
  15. Real Interest Rates
    • Nominal interest rate adjusted for inflation
    • The rate of growth in the real purchasing power of a deposit or debt

    (Nominal Interest Rate) - (Inflation Rate)
  16. What is the price of a loan?
    The interest paid to the lender
  17. Supply of loanable funds
    • Amount of money people are willing to lend 
    • Upward sloping
  18. Demand for loanable funds
    Amount of loans demanded by households, firms, and governments
  19. Law of supply in relation to interest rates of loans
    • Higher rates = more people willing to lend 
    • Upward sloping supply curve
  20. Law of demand in relation to interest rate of loans
    • Higher rates = fewer people wanting to borrow
    • Downward sloping demand curve for loans
Card Set
Econ Test #2 Study
Measurement of Inflation