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Inflation

inflation - sustained rise in general price level  

  • (Pt - Pt-1) / (Pt-1)
  • 2 main price levels - GDP deflator, Consumer Price Index
  • GDP deflator - measures average price of output
    • nominal GDP / real GDP
    • index number used for comparison (values arbitrarily set)
    • nominal GDP growth > real GDP growth >> inflation
  • Consumer Price Index - measures average price of consumption, cost of living
    • not all production consumed by average consumer (some imported or sold to firms/gov'ts/foreigners)
    • gives cost of specific list of goods/services
    • represents consumption basket of typical consumer
    • doesn't take into account how consumers can substitute across goods
  • inflation rate - rate at which price level increases
  • nominal GDP = real GDP + inflation

private savings (S) - disposable income minus consumption  

  • opposite of consumption function
  • S = YD - C
    • S = (Y-T)-C
    • S = -c0+(1-c1)(Y-T)
    • (1-c1) - propensity to save, note that propensity to save and propensity to consume add up to 1
  • at equilibrium, Y = Z = C+I+G
  • S = C+I+G -T-C = I+G-T
    • I = S+(T-G) >> public saving = (T-G)
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