Most macroeconomic quantities fluctuate together: Although real GDP is usually used to monitor short-run changes in the economy, it really doesn’t matter which measure of economic activity is used because most macroeconomic variables that measure income, spending or production move in the same direction, though by …

The economy is said to be in recession if the growth of GDP is negative. In Figure 9-1, recessions are shaded. Economists call these short-run fluctuations in output and employment the business cycle, even though these fluctuations are actually irregular.

In the short run, shifts in aggregate demand cause fluctuations in the economy’s output of goods and services. In the long run, shifts in aggregate demand affect the overall price level but do not affect output. Aggregate supply shifts the curve to the left when: Output falls below the natural rate of employment.

1. Real GDP is the variable that is most often used to examine short-run changes in the economy. 2. However, most macroeconomic variables that measure some type of income, spending, or production fluctuate closely together.

inflation rate

If aggregate demand increases to AD2, in the short run, both real GDP and the price level rise. If aggregate demand decreases to AD3, in the short run, both real GDP and the price level fall.

Wage push inflation has an inflationary spiral effect that occurs when wages are increased and businesses must — to pay the higher wages — charge more for their products and/or services. Additionally, any wage increase that occurs will increase the money supply of consumers.

Increased demand is good for local economies A study by the Federal Reserve Bank of Chicago estimates that a $1 raise for a minimum wage worker translates to an additional $2,080 in consumer spending by their household over the course of a year.

The Fair Labor Standards Act set the minimum wage at 25 cents per hour. Adjusted for inflation, that’s about $4.60 today.

The following are the steps to calculate a wage increase based on inflation.

1. Step #1: Get the 12-month rate of inflation from the Consumer Price Index (CPI).
2. Step #2: Convert the percentage to a decimal by dividing the rate by 100 (2% = 2 ÷ 100 = 0.02).
3. Step #3: Add one to the result from Step #2 (1 + 0.02 = 1.02).

Inflation adjustment, or “deflation”, is accomplished by dividing a monetary time series by a price index, such as the Consumer Price Index (CPI). By adjusting for inflation, you uncover the real growth, if any. …

The second step is to calculate the level of inflation over the period using the following formula: Inflation = (Ending CPI level – Beginning CPI level) / Beginning CPI level = (721 – 700) / 700 = 3 percent.