Chapter 7 Flashcards
what is inflation?
an increase in the general (average) price level of goods and services in the economy
what is deflation?
a decrease in the general (average) price level of goods and services in the economy
what is the consumer price index (CPI)?
an index that measures changes in the average prices of consumer goods and services
T or F Inflation is an increase in the overall average level of prices and not an increase in the price of any specific product
True
what is a base year?
a year chosen as a reference point for comparison with some earlier or later year
what is the equation to calculate CPI?
CPI = [(cost of market basket of products at current - year prices) / (cost of some market basket of products at base - year prices)]100
how do you calculate the annual rate of inflation?
annual rate of inflation = [(CPI in given year - CPI in previous year) / CPI in previous year ]100
what is disinflation?
a reduction in the rate of inflation
what is nominal income?
the actual number of dollars received over a period of time
what is real income?
the actual number of dollars received (nominal income) adjusted for changes in the CPI
what is the equation for real income?
real income = nominal income / CPI (as decimal or CPI/100)
people whose nominal incomes rise faster than the rate of inflation gain purchasing power, while people whose nominal incomes do not keep pace with inflation lose purchasing power T or F
True
what is the formula to convert past salary to current salary today?
salary in a given year = salary in previous year X (CPI in given year / CPI in previous year)
what is wealth?
the value of the stock of assets owned at some point in time
what is nominal interest rate?
the actual rate of interest without adjustment for the inflation rate
