Price Level & inflation

• Definition of the Consumer Price Index and the GDP deflator
• Calculation of price index (e.g., CPI, GDP deflator)
• Calculation of inflation (Note: inflation is the rate of change in a price index from one year to another)
• Limitation of the CPI (e.g., commodity substitution bias, quality bias, new goods bias, outlet substitution bias)

Aggregate Supply (AS)-Aggregate Demand model (AD)

• AS and AD are relationships between price level & real GDP, other factors held constant
• What are the factors that cause AS and AD to change (i.e., to shift)?
• Understand AS, AD, SAS, LAS Distinction between actual real GDP and potential GDP
• o Understand what an output gap is? What is a recessionary gap and what is an inflationary gap?
• o What is fiscal policy - automatic versus discretionary
• o What is expansionary fiscal policy? What is contractionary fiscal policy?
• o Fiscal policy & shifts in the AD curve
• o Fiscal policy & shifts in the SAS and LAS curve