chapter 14 for test

Question 1

inflation

Answer 1

steady and persistent increase in the general level of prices
it is the rate at which your money loses its ability to buy goods/services

Question 2

deflation

Answer 2

general decrease in the average level of prices

Question 3

CPI

Answer 3

composite price index
examines changes in the general prices level ie many goods
takes into consideration the importance of the amount spent on each good (weights)

Question 4

calculating CPI

Answer 4

1. choose a base year and let all prices =100
2. select the goods and find the prices for all years
3. construct a simple price index for each
4. multiply SPI by the weight
5. add to get CPI

Question 5

simple price index

Answer 5

price in any year/ price in base year x100``

Question 6

effects of inflation

Answer 6

lower standard of living
increased wage demands
savings are discouraged
increase in unemployment
loss of international competitiveness

Question 7

effects of deflation

Answer 7

reduced demand
unemployment rises
economic growth slows
less investment

Question 8

how monetary policy influences the rate of inflation

Answer 8

changing the amount of money in circulation through open market operations (quantitative easing)
changing the ECB base rate on which all variable rates depend on
changing the rules on issuing loans, thus affecting the availability of credit