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Meeting’s Topics: - Inflation - Good Market (2)

Meeting’s Topics: - Inflation - Good Market (2). Macroeconomics Matriculation DD PPIE, 11 Agustus 2009. Inflation. Definition: sustained price in the general level of price Two indexes: GDP deflator & Consumer Price Index (CPI). GDP Deflator.

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Meeting’s Topics: - Inflation - Good Market (2)

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  1. Meeting’s Topics:- Inflation- Good Market (2) Macroeconomics Matriculation DD PPIE, 11 Agustus 2009

  2. Inflation • Definition: sustained price in the general level of price • Two indexes: GDP deflator & Consumer Price Index (CPI)

  3. GDP Deflator • Measure average price of output (final goods produced in the economy) • $Yt = Pt Yt Nominal GDP Price Real GDP • Pt = $Yt / Yt • Inflation = (Pt – Pt-1)/ Pt-1 CPI • Measure average price of some bundle of consumption

  4. Inflation & unemployment=>Phillips Curve: Low unemp  inflation ↑High unemp  inflation ↓ • Why economist care about inflation: • Inflation affects income distribution • Leads to uncertainty, influence investment decisions

  5. The Goods Market • Demand • Production • Income

  6. Composition of GDP • Consumption purchased by consumer • Investment Fixed Investment: Residential & Non-Residential (machine, etc), NOT Financial Investment • Government Spending purchased of goods/services by gov’nt, not incl. government transfer • Net Export/Trade Balance : X-M • Inventory Investment : the difference between production and sales (if Prod > Sales = + )

  7. The Demands for Goods (Z) • Z ≡ C+ I + G +X – IM  identity eq. • Assume, to simplify: - Firms are willing to supply any amount of good at a given price, P (only valid in SR) - Economy is closed, X = IM = 0) Z ≡ C+ I + G

  8. Consumption • C = C (YD)  behavioral eq. YD = disposable income • Assume: linear relation: C = c0+ c1YD • c0  if YD = 0, then C= c0 • c1  marginal propensity to consume • YD ≡ Y-T • C = c0+ c1(Y-T)

  9. Investment (I) • I as exogenous variable Government Spending (G) • Fiscal Policy : T (Taxes – Government Spending)

  10. The Determination of Equilibrium Output Equilibrium condition: Y = Z (production = demand) Assume: inventory investment = 0 Demand in turn depends on income Y, which is itsel equal to production

  11. Autonomous spending • multiplier

  12. Do analyze by using • Algebra • Graph • Words

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