Chapter 22 Key Terms

Question 1

adjustable-rate mortgage (ARM):

Answer 1

a loan used to purchase a home in which the interest rate varies with market interest rates

Question 2

base year:

Answer 2

arbitrary year whose value as an index number is defined as 100; inflation from the base year to other years can easily be seen by comparing the index number in the other year to the index number in the base year – for example, 100; so, if the index number for a year is 105, then there has been exactly 5% inflation between that year and the base year

Question 3

basket of goods and services:

Answer 3

a hypothetical group of different items, with specified quantities of each one meant to represent a “typical” set of consumer purchases, used as a basis for calculating how the price level changes over time

Question 4

Consumer Price Index (CPI):

Answer 4

a measure of inflation calculated by U.S. government statisticians based on the price level from a fixed basket of goods and services that represents the purchases of the average consumer

Question 5

core inflation index:

Answer 5

a measure of inflation typically calculated by taking the CPI and excluding volatile economic variable such as food and energy prices to better measure the underlying and persistent trend in long-term prices

Question 6

cost-of-living adjustments (COLAs):

Answer 6

a contractual provision that wage increases will keep up with inflation

Question 7

deflation:

Answer 7

negative inflation; most prices in the economy are falling

Question 8

Employment Cost Index:

Answer 8

a measure of inflation based on wages paid in the labor market

Question 9

GDP deflator:

Answer 9

a measure of inflation based on the prices of all the components of GDP

Question 10

hyperinflation:

Answer 10

an outburst of high inflation that is often seen (although not exclusively) when economies shift from a controlled economy to a market-oriented economy

Question 11

index number:

Answer 11

a unit-free number derived from the price level over a number of years, which makes computing inflation rates easier, since the index number has values around 100

Question 12

indexed:

Answer 12

a price, wage, or interest rate is adjusted automatically for inflation

Question 13

inflation:

Answer 13

a general and ongoing rise in the level of prices in an economy

Question 14

International Price Index

Answer 14

a measure of inflation based on the prices of merchandise that is exported or imported

Question 15

Producer Price Index (PPI):

Answer 15

a measure of inflation based on prices paid for supplies and inputs by producers of goods and services

Question 16

quality/new goods bias:

Answer 16

inflation calculated using a fixed basket of goods over time tends to overstate the true rise in cost of living, because it does not take into account improvements in the quality of existing goods or the invention of new goods

Question 17

substitution bias:

Answer 17

an inflation rate calculated using a fixed basket of goods over time tends to overstate the true rise in the cost of living, because it does not take into account that the person can substitute away from goods whose prices rise by a lot