Chapter 8 - The Prive Level & Inflation

Question 1

When does inflation occur?

Answer 1

When price levels rise

Question 2

What is an extremely high inflation rate called?

Answer 2

Hyperinflation

Question 3

What occurs when the overall price level drops?

Answer 3

Deflation

Question 4

What is considered negative inflation?

Answer 4

Deflation

Question 5

Who measures reports and inflation rates?

Answer 5

The Bureau of Labor Statistics (BLS)

Question 6

What is the most common price level used to measure the inflation rate?

Answer 6

The consumer price index (CPI)

Question 7

What is the measure of the price level based on the consumption pattern of a typical consumer?

Answer 7

The consumer price index

Question 8

What makes up the largest portion of the CPI market basket?

Answer 8

Housing

Question 9

How do you find your basket price?

Answer 9

1. Quantity x Price

2. Add all up

Question 10

What are the steps in calculating the CPI?

Answer 10

1. You figure out your basket price of the base year
2. You create you index
3. Compute your price index

Question 11

How do you calculate your price index?

Answer 11

(basket price of current year/ basket price of base year) x 100

Question 12

What is calculated as the percentage change in the price level?

Answer 12

The inflation rate

Question 13

How do you calculate the inflation rate?

Answer 13

((Current index - base year index)/Base year index) x 100

Question 14

2014

(2) Popcorn = $4
(2) Coke = $4
(1) Movie Ticket = $8

2015

(2) Popcorn = $6
(2) Coke = $4
(1) Movie Ticket = $10

1. Calculate the CPI of 2015
2. Calculate the inflation rate

Answer 14

1. 125

2. 25%

Question 15

When CPI rises do individual prices always rise?

Answer 15

No

Question 16

How do you measure the price of something over time?

Answer 16

original price x (Today’s CPI/Base year CPI)

Question 17

Do wages rise or fall when CPI rises?

Answer 17

They rise

Question 18

What are the 3 most common concerns when CPI overstates true inflation?

Answer 18

1. Substitution
2. Changes in quality
3. New products and locations

Question 19

What is the measure of CPI in which the consumer’s basket is updated monthly?

Answer 19

Chained CPI

Question 20

What is it called when as prices go up so does the cost to hold money?

Answer 20

Shoe-leather costs

Question 21

What is it called when people interpret nominal wage or price change as real changes?

Answer 21

Money illusion

Question 22

What is a person’s wage expressed in current dollars called?

Answer 22

Nominal wage

Question 23

What is the nominal wage adjusted for changes in price level called?

Answer 23

Real wage

Question 24

What is the cost of changing prices called?

Answer 24

Menu costs

Question 25

What is the production that a firm creates called?

Answer 25

Output

Question 26

If unexpected inflation occurs who is better off, you or the bank?

Answer 26

You

Question 27

If unexpected deflation occurs who is better off, you or the bank?

Answer 27

The bank

Question 28

If inflation is expected will the bank require more or less money in return?

Answer 28

More

Question 29

What is it called when you are unable to tell the difference between a demand increase or inflation?

Answer 29

Price confusion

Question 30

What is it called when inflation makes capital gains appear larger and thus increases tax burdens?

Answer 30

Tax distortion