Correcting Stats for Inflation & Aggregate Supply and Demand Chapter 13 Section 2 and 3 Correcting Stats for Inflation & Aggregate Supply and Demand

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Inflation Prolonged rise in the general price level of final goods and services. Inflation decreases the Purchasing Power of the dollar. Value of the dollar is lower.

Deflation Prolonged decline in the general price level of goods and services. Not as common as inflation

Measures of Inflation Consumer Price Index (CPI) Producer Price Index (PPI) Real GDP

Consumer Price Index (CPI) Measure of the average prices of a specified set of goods and services purchased by typical consumers in city areas. In simple terms – Average change in prices from month to month

CPI (Cont.) Market Basket – Representative sample of goods and services used to calculate the CPI 80,000 specific goods and services (food, housing, clothing, etc) Updated every 10 years Base Year – Year used as a point of comparison

Producer Price Index (PPI) Measure of the change in price over time that U.S. producers charge for their goods and services. Price change of wholesale goods Changes in the PPI hint to changes in consumer prices (IE – The price you pay for goods)

Real GDP GDP that has been adjusted for inflation - Base year for Real GDP is the year 2000 GDP Price Deflator - Removes the effects of inflation from GDP GDP inaccurate without figuring in for inflation.

Aggregates Summation of all the individual parts in the economy.

Aggregate Demand Aggregate Demand (Book Definition) – The total of all planned expenditures in the entire economy.

Continued Another Definition – Total amount of goods and services demanded in the economy. C + I + G + X Price Level – Average price of all prices as measured by a price index.

Aggregate Demand Shows…. Increase in Price Level (Inflation) = Goods more expensive, purchasing power goes down, fewer goods purchased. Decrease in Price Level (Deflation) = Goods less expensive, purchasing power goes up, more goods purchased.

What can cause a shift in aggregate demand?

Aggregate Supply Real domestic output of producers based on the rise and fall of the price level.