12 Flashcards
What is the price level?
measure of the average prices of goods and services in the economy
What is inflation?
percentage increase in the price level index from one period to the next
What is the relationship between inflation and the purchasing power of the dollar?
Inflation goes up, purchasing power goes down
What is hyperinflation?
Out of control price increases
What is deflation?
decrease in the average level of prices
What are the major price indexes?
GDP deflator
Consumer price index - CPI
Producer price index - PPI
What is the consumer price index (CPI) and what does it measure?
Measures the average price for a basket of goods and services
How is the CPI calculated?
cost of basket/cost of basket base year *100
How is inflation measured using the CPI?
CPI(t)-CPI(t-1)/CPI(t-1) *100
What is the CPI used to estimate?
cost of living, social security, alimony, child support, rent increases
How can you use CPI as a tool?
Approximate real growth
convert past prices into current dollars
adjust for inflation
estimate retirement needs
How can you tell if the real price of something has risen or fallen over time?
adjust for inflation
What is the producer price index (PPI)?
average of prices received by producers of goods and services
What is the relationship between the PPI and CPI?
fluctuations are an early warning of movement in consumer prices
What causes inflation?
Increase in money supply
Fircal policy: Government defecits increase
Monetary policy: Printing more money
What is the quantity theory of money?
Mv=PY(r)
Moneyvelocity of money=Pricerealgdp
when v and y are fixed, increases in m must cause increases in p
It’s literally just a proof in math
What are the costs of inflation?
Price confusion and money illusion
Redistributes wealth
Interacts with other taxes
Painful to stop
