Ch 5 Inflation and the Price Level

Question 1

Consumer price index (CPI)

Answer 1

for any period, a measure of the cost in that period of a standard basket of goods and services relative to the cost of the same basket of goods and services in a fixed year, called the base year

Question 2

Price index

Answer 2

a measure of the average price of a given class of goods or services relative to the price of the same goods or services in a base year

Question 3

Deflation

Answer 3

a situation in which the prices of most goods and services are falling over time so that inflation is negative

Question 4

Core rate of inflation

Answer 4

the rate of increase of all prices except energy and food

Question 5

Nominal quantity

Answer 5

a quantity that is measured in terms of its current dollar value

Question 6

Real quantity

Answer 6

a quantity that is measured in physical terms- for example, in terms of quantities of goods and services

Question 7

Deflating (a nominal quantity)

Answer 7

the process of dividing a nominal quantity by a price index (such as the CPI) to express the quantity in real terms

Question 8

Real wage

Answer 8

the wage paid to workers measured in terms of purchasing power; the real wage for any given period is calculated by dividing the nominal (dollar) wage by the CPI for that period

Question 9

Indexing

Answer 9

the practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index. Indexing prevents the purchasing power of the nominal quantity from being eroded by inflation

Question 10

Price level

Answer 10

a measure of the overall level of prices at a particular point in time as measured by a price index such as the CPI

Question 11

Relative price

Answer 11

the price of a specific good or service IN COMPARISON TO the prices of other goods and services

Question 12

Real interest rate

Answer 12

the annual percentage increase in the purchasing power of a financial asset; the real interest rate on any asset equals the nominal interest rate on that asset minus the inflation rate

Question 13

Nominal interest rate (or Market interest rate)

Answer 13

the annual percentage increase in the nominal value of a financial asset

Question 14

Inflation-protected bonds

Answer 14

bonds that pay a nominal interest rate each year equal to a fixed real rate plus the actual rate of inflation during that year

Question 15

Fisher effect

Answer 15

the tendency for nominal interest rates to be high when inflation is high and low when inflation is low