Chapter 12:Inflation and the Quantity Theory of Money Flashcards
What is inflation?
an increase in the general or average level of prices
What is the inflation rate?
percentage increase in the average level of prices over a period of time
How do you calculate the inflation rate?
Take the difference between year 1 and 2 and divide by year 1
(P2-P1)/P1 *100
What is the consumer price index?
measure the average price for a basket of goods and service bought by a typical American consumer
In waht way is the consumer price index weighted?
So that an increase in the price of a major item counts for more than an increase in the price of a minor item
What is the GDP deflator?
The ratio of nominal to real GDP multiplied by 100. This covers all final goods
What are the producer price indexes?
They measure the average price received by producers
What are producer price indexes often used for?
To calculate changes in the cost of inputs
What is a real price?
a price that has been corrected for inflation. This is used to compare the prices of goods over time
What two things does the quantity theory of money do?
- sets the relationship between money, velocity, real output, and prices
- helps explain the role of the money supply in determining inflation rate
What is the quantity theory of money?
Mv=PYr
What does M stand for in the quantity theory of money?
money supply
What does v stand for?
the velocity of money
What is the velocity of money?
the average number of times a dollar is spent on final goods and services in a year
What does P stand for?
price level
