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7.1: Introduction

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    250513

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    Module 5 – CPL, Inflation, and Money

    Module Introduction

    The rate of inflation, commonly measured as the change in the consumer price index (CPI), is the third major indicator of economic performance, which provides information about how prices have changed in an economy.

    This module will explain what the Consumer Price Index (CPI) is and how it is calculated and used in the calculation of the inflation rate. We will take a look at the limitations of the CPI as a measure of the cost of living and examine alternative measures of the price level: the GDP price index, the Personal Consumption Expenditures (PCE) price index, and the PCE price index excluding food and energy. We will also discuss how to compare the value of money across time by using CPI and inflation rate to calculate real wage rates and real interest rates.

    In addition, this module will focus on money, its functions, the Banking System, the Federal Reserve System (Fed) and the Fed’s main policy tools. We will also discuss the relationship between money growth, inflation, and real GDP growth in the long run via the Quantity Theory of Money. (1)

    Learning Objectives

    • Explain and calculate Consumer Price Index (CPI).
    • Explain the limitations of the CPI and describe other measures of the price level.
    • Adjust money values for inflation.
    • Calculate real wage rates and real interest rates.
    • Explain the functions of money.
    • Describe the Fed’s main policy tools.
    • Explain the relationship between money growth, inflation, and real GDP growth. (1)

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