2. Inflation

Question 1

Ongoing pressure of rise in prices of the economy
- Loss of resources leading to fewer goods being available
- Increased spending by consumers and businesses
- At the peak of business cycle is concerning
- Inflation is most likely to take place during an expansion, not recession

Answer 1

Inflation

Question 2

Use % Change
- Result - initial divided by initial

Answer 2

Comparing CPI

Question 3

1. Compute total costs of each year
2. Recent year total divided by base year total
3. x 100
4. Answer is by 1 decimal place over

Answer 3

Compute Price Index

Question 4

UR + Inflation Rate

Answer 4

Misery Index

Question 5

Change in Nominal Interest rate = Change in Inflation
- So the Real Interest Rate stays unchanged every time

Answer 5

Fisher Effect

Question 6

1) Menu costs - supply/supplier adjustments to inflation

2) Shoeleather costs - consumer adjustments to inflation

3) Inflation induced tax distortion - higher paychecks > more taxes (nominal)

Answer 6

Cost of Inflation