Chapter 14: Inflation Flashcards
Define the term: Inflation
A sustained rise in the average price level*
What groups are most hard hit by inflation?
Elderly, disabled, and any one else on a fixed income, savers, creditors, and consumers
Define the term: Fixed income
An income that doesn’t change over time
Define the term: Cost of Living Adjustment (COLA)
An adjustment of payments or wages upwards to adjust for inflation
Explain how and why creditors lose when inflation occurs.
Because the money they lent out has lower value than when they lent it.
Explain how and why people with savings accounts lose when inflation occurs.
Money in banks loses its value as inflation occurs and because interest rates from banks are low, does not keep up with inflation, resulting in lower buying power in that saved money
What happens to purchasing power as inflation occurs?
It goes down because fewer goods can be purchased with the same amount of money
Who are the winners of inflation?
Borrowers, former employees, and pension managers
What is the problem with using the GDP deflator to measure inflation
GDP deflator uses all items in an economy, and not just items commonly purchased by consumers. Warships <> potato chips
What is the primary tool used to measure inflation?
Consumer Price Index (CPI)
Define the term: Consumer Price Index
A collection of approximately 400 goods and services that urban households purchase
How is the CPI used to determine inflation?
Recent CPI minus Earlier CPI divided by Earlier CPI multiplied by 100
What are the two models used to explain the cause of inflation?
Cost-Push and Demand-Pull
Define the term: Cost-Push Inflation
The theory that suggests that inflation kicks off with businesses increasing their prices, resulting in demand for higher wages, which causes an increase in prices
What MUST happen to the money supply to have a functioning economy with room for growth
An increase in money supply
