Chapter 12 - Inflation Flashcards
Inflation:
An increase in the average level of prices. Inflation is measured by changes in a price index.
Inflation Rate:
The percent change in a price index from one year to the next.
Consumer Price Index (CPI):
Measures the average price for a basket of goods and services bought by a typical American consumer.
GDP Deflator:
The ratio of nominal to real GDP multiplied by 100. Covers all final goods.
Producer Price Index (PPI):
Measure the average price received by producers. Includes final and intermediate goods.
The Quantity Theory Of Money:
M V = P Yr
M = Money Supply
V = Velocity of Money
P = Price Level
Yr = Real GDP
Fisher Effect:
The tendency of nominal interest rates to rise with expected inflation rates.
The Fisher effect says that the nominal interest rate is equal to the expected inflation rate plus the equilibrium real interest rate.
Velocity Of Money (v):
The average number of times a dollar is spent on final goods and services in a year. In short, it refers to how fast money passes from one holder to the next. In the U.S. today, v is about 7.
Deflation:
Disinflation:
A decrease in the average level of prices (a negative inflation rate).
A reduction in the inflation rate.
Money Illusion / Price Confusion:
When people mistake changes in nominal
prices for changes in real prices.
Real Rate Of Return:
Nominal Rate Of Return:
The nominal rate of return minus the
inflation rate.
The rate of return that does not account
for inflation.
Monetizing The Debt:
When the government pays off its debts
by printing money.
