Chapter 8 - The Prive Level & Inflation Flashcards
When does inflation occur?
When price levels rise
What is an extremely high inflation rate called?
Hyperinflation
What occurs when the overall price level drops?
Deflation
What is considered negative inflation?
Deflation
Who measures reports and inflation rates?
The Bureau of Labor Statistics (BLS)
What is the most common price level used to measure the inflation rate?
The consumer price index (CPI)
What is the measure of the price level based on the consumption pattern of a typical consumer?
The consumer price index
What makes up the largest portion of the CPI market basket?
Housing
How do you find your basket price?
- Quantity x Price
2. Add all up
What are the steps in calculating the CPI?
- You figure out your basket price of the base year
- You create you index
- Compute your price index
How do you calculate your price index?
(basket price of current year/ basket price of base year) x 100
What is calculated as the percentage change in the price level?
The inflation rate
How do you calculate the inflation rate?
((Current index - base year index)/Base year index) x 100
2014
(2) Popcorn = $4
(2) Coke = $4
(1) Movie Ticket = $8
2015
(2) Popcorn = $6
(2) Coke = $4
(1) Movie Ticket = $10
- Calculate the CPI of 2015
- Calculate the inflation rate
- 125
2. 25%
When CPI rises do individual prices always rise?
No
How do you measure the price of something over time?
original price x (Today’s CPI/Base year CPI)
Do wages rise or fall when CPI rises?
They rise
What are the 3 most common concerns when CPI overstates true inflation?
- Substitution
- Changes in quality
- New products and locations
What is the measure of CPI in which the consumer’s basket is updated monthly?
Chained CPI
What is it called when as prices go up so does the cost to hold money?
Shoe-leather costs
What is it called when people interpret nominal wage or price change as real changes?
Money illusion
What is a person’s wage expressed in current dollars called?
Nominal wage
What is the nominal wage adjusted for changes in price level called?
Real wage
What is the cost of changing prices called?
Menu costs
What is the production that a firm creates called?
Output
If unexpected inflation occurs who is better off, you or the bank?
You
If unexpected deflation occurs who is better off, you or the bank?
The bank
If inflation is expected will the bank require more or less money in return?
More
What is it called when you are unable to tell the difference between a demand increase or inflation?
Price confusion
What is it called when inflation makes capital gains appear larger and thus increases tax burdens?
Tax distortion
