Macroeconomic objectives: Problems and Policies

• Inflation


  A sustained rise in the average price level
• Rate of Inflation

  The percentage change in the average price level over a period of time - usually a year
• Purchasing Power


  The amount of goods and services that can be bought with a given amount of money income
• What is it called when the inflation rate falls from 5% to 3%

  Disinflation
• What is it called when the average price level falls over time

  Deflation
• Real GDP

  Nominal GDP adjusted to cancel the effect of inflation
• Nominal GDP


  The value of GDP reflecting inflation
• Calculating Real GDP

  Nominal GDP * (Price Index in base year / Price Index in current year)
• Calculating the Real interest rate

  ( Nominal interest rate ) - ( inflation rate )
• Economic consequences of inflation:

  • Redistribution of income from lenders to borrowers
  • Savers may lose out if r/i < inflation
  • Fiscal drag
  • Uncertainty
  • Inflationary costs for firms
  • Inflationary noise
  • Loss of external competitiveness
• Evaluation points

  • ADD HERE