Chapter 9 Flashcards
what is known as a rise in the level of prices in an entire economy
inflation
Inflation occurs due to
poor monetary policies and peoples expectations
Inflation is a rise in ___ prices
ALL
a typical set of consumer purchases refers to
the basket of goods and services
How do we calculate consumer price index?
Current Expenditure on Basket/ Base Year Expenditure on Basket X100
How can we calculate the Inflation Rate?
CPI this year-CPI last year/CPI last year X100
the percentage change in CPI in respect to the last year
Inflation Rate
shows how many times the same amount of goods is more expensive today compared to the base year
Consumer Price Index
consumers replacing more expensive goods refers to
Substitution Bias
the quality of goods in a basket improves fast
Quality/New Goods Bias
what do we use to automatically adjust a price, wage, or interest rate to keep up with inflation
Indexing
The two types of Indexing are known as a
COLA (Cost of living adjustment) and ARM (Adjustable Rate Mortgage)
A Cost of Living Adjustment (COLAS) is a
contractual provision that wage increases will keep up with inflation
An Adjustable Rate Mortgage (ARM) are
mortgage contracts in which the interest rate varies with market interest rates
Government Indexing Programs include
Tax Brackets, Social Security Payments, and Indexed Bonds
Tax Brackets determine..
an individuals tax rates and are indexed to account for inflation
The Government uses Indexed bonds to..
pay a certain real rate of interest above whatever inflation rate occurs
Bank of Canada’s targeted rate of inflation is
2%
the Core Inflation Index excludes..
volatile categories from the CPI
is a price index based on prices paid for supplies and inputs by domestic producers of goods and services
Producer Price Index (PPI)
measures the level of wages paid in the labor market, we use this to measure wage inflation
Employment Cost Index
measures a price level based on the prices of merchandise that are exported or imported
International Price Index
is based on the prices of all GDP components (consumption, investment, government, and net exports)
GDP Deflator
What problems can arise when wages, some prices, and interest rates dont follow the rate of inflation?
Redistributions of wealth, Blurred price signals, and Difficulties in long term planning
Redistribution of wealth
those who hold an important part of their wealth in cash will see their wealth being eroded by the increase in prices, those who hold their wealth in interest-earning assets are not much affected
Blurred price signals
People are confused on whether changes in prices of individual goods are due to inflation or change in relative prices
Difficulties in long term planning
inflation erodes savings
What is known as the Fishers formula
Real interest rate= Nominal Interest rate-Inflation
rising inflation rates are followed by ______ productivity rates
lower
lower inflation rates correspond to __________ productivity rates
higher
How do we find what the price of an item in year 1 would be in year 2?
price of the lower year you want to calculate X (1+inflation rate/100) ^number of years
OR
price of the higher year you want to calculate/(1+inflation rate/100)^number of years
To calculate Real GDP
Nominal Value/GDP Deflator X100
To calculate Real GDP growth rate..
%Change in Growth Rate= Real GDP of 2nd year-Real GDP of 1st year/ Real GDP of 1st year X100
The term negative inflation is synonymous with what
deflation
T or F; inflation influences businesses, taxpayers, consumers and everyone throughout the economy.
True
