Chapter 12 Flashcards
what is inflation?
A generalized rise in the overall level of prices.
Also described as…
➢ A rise in the cost of living.
➢ A decline in the purchasing power of money.
What is the consumer price index
its a way to see how prices for things people usually buy go up or down over time. In simpler words, it helps us understand if the everyday cost of living is going up or down for the average person.
what is does the term “basket” mean
A metaphor for the list of goods and
services people typically buy.
➢ It’s the food you buy, but also the shelter, education, haircuts, and streaming services you
pay for.
How do you calculate the inflation rate
Price level this year - Price level last year divided by price level last year x 100
what is the inflation rate
The percentage increase in the average price level of goods and services in an economy over a period of time. It measures how much prices have risen, indicating the rate at which the purchasing power of money is declining.
how do you measure inflation
- Find out what people buy.
- Collect prices.
- Tally up the cost of the
basket. - Calculate inflation as the
percentage change in the
prices of the basket.
what is deflation
a generalized decrease in the overall level of prices.
why can deflation be a problem
some people stop buying goods and services in order to wait for them to become cheaper.
what are 3 things CPI misses
- Quality improvements
- New products
- Substitutions
how can quality improvements hide price decreases.
by making a product or service better while keeping the price the same or slightly increasing it. Even if the price doesn’t go down, consumers get more value for their money because they are getting a higher-quality product or service.
why doesn’t CPI account for the reduction in the cost of living due to the introduction of new products.
iPhone replaced many goods and services on which people previously spent lots of money.
➢ Replaced: landline, answering machines, calculators, cameras and film, GPS devices, music players, etc.
What causes the Consumer Price Index (CPI) to make changes in the cost of living seem higher than they actually are?
it tracks the changing price of a fixed basket of goods.
➢ Consumers’ buying patterns change often!
what is Substitution bias
when the price of a good or service increases, consumers might substitute it with a more affordable alternative.
what is the Personal Consumption Expenditure deflator (PCE deflator)
is a way to figure out how prices for things people use in the United States are changing. The basket of goods includes stuff you use, even if you don’t pay for it directly (like medical care paid for by your employer).
what is core inflation
a measure that looks at how the prices of goods and services are changing, but it excludes certain volatile items that might have big price swings. Essentially, it focuses on the more stable, everyday prices to give a clearer picture of the overall trend in inflation.
