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)