11.2: Inflation and Indicators

Question 1

What are the Theories of business cycle:

Answer 1

• Keynesian
• New Keynesian
• Monetarist
• Austrian
• New classical

Question 2

• Keynesian: shifts in … cause business cycles; downward sticky wages prevent … ; …/ …. should be used to influence …

Answer 2

• Keynesian: shifts in AD cause business cycles; downward sticky wages prevent recovery; monetary/ fiscal policy should be used to influence AD.

Question 3

• New Keynesian: in addition to … , other production factors are also … sticky.

Answer 3

• New Keynesian: in addition to wages, other production factors are also downward sticky.

Question 4

• Monetarist: inappropriate changes in … … cause business cycle; money supply should be … and …

Answer 4

• Monetarist: inappropriate changes in money supply cause business cycle; money supply should be steady and predictable.

Question 5

• Austrian: … interventions cause business cycles; markets should be … to …

Answer 5

• Austrian: government interventions cause business cycles; markets should be allowed to self-correct.

Question 6

• New classical: changes in … and … … cause business cycles; no … … is necessary.

Answer 6

• New classical: changes in technology and external shock cause business cycles; no policy action is necessary.

Question 7

• Leading economic indicators have turning points that usually … those of the … … They are believed to have value for … the economy’s future state, usually …-…

Answer 7

• Leading economic indicators have turning points that usually precede those of the overall economy. They are believed to have value for predicting the economy’s future state, usually near-term.

Question 8

• Coincident economic indicators have turning points that are usually … to those of the overall economy. They are believed to have value for … the economy’s … …

Answer 8

• Coincident economic indicators have turning points that are usually close to those of the overall economy. They are believed to have value for identifying the economy’s present state.

Question 9

• Lagging economic indicators have turning points that take place … than those of the overall economy. They are believed to have value in … the economy’s … condition and only change after a … has been established.

Answer 9

• Lagging economic indicators have turning points that take place later than those of the overall economy. They are believed to have value in identifying the economy’s past condition and only change after a trend has been established.

Question 10

Types of Inflation:

Answer 10

Deflation - negative inflation rate that is, an inflation rate of less than 0%.

Hyperinflation

Disinflation - a decline in the inflation rate.

Question 11

Indexes used to measure inflation:

Answer 11

Laspeyres: uses base year consumption basket.

Paasche: uses current year consumption basket.

Question 12

Rate of Inflation formula:

Answer 12

Rate of Inflation = (CPIx+1 – CPIx ) / CPIx

· CPIx is Consumer Price Index of Initial Year
· CPIx+1 is Consumer Price Index of next year

Question 13

· Headline inflation - refers to the … … calculated based on the … … that includes all goods and services in an economy.

Answer 13

· Headline inflation - refers to the inflation rate calculated based on the price index that includes all goods and services in an economy.

Question 14

· Core inflation - refers to the inflation rate calculated based on a … … of goods and services except … and …

Answer 14

· Core inflation - refers to the inflation rate calculated based on a price index of goods and services except food and energy.