Chapter 9: Inflation

Question 1

Inflation

Answer 1

Decline in purchasing power of money, as prices increase

Question 2

Average US Inflation Rate

Answer 2

2-4%

Question 3

Hyperinflation

Answer 3

Rapid, out of control price increase in an economy (often 50%+ per month)

Question 4

Deflation

Answer 4

Negative inflation. Buyer power of money increases

Question 5

Problems Caused By Inflation (3)

Answer 5

1. Redistribution of purchasing power
2. Blurred price signals
3. Difficulties in long-term planning

Question 6

Who is hurt by inflation?

Answer 6

1. Anyone holding financial assets with a nominal return that does not keep up with inflation (such as cash)
2. Retirees with fixed-rate income such as pensions

Question 7

Nominal Interest Rate

Answer 7

he interest rate before inflation is taken into account (also, advertised/stated interest on a loan, before fees or compounding interest)

Question 8

Real Interest Rate

Answer 8

Interest rate that takes inflation into account

Question 9

What is the benefit of a defined contribution retirement plan over a pension?

Answer 9

Contribution Plan (such as 401k) will generate rates of return over time. 
Pension is fixed income, which does not keep up with inflation.

Question 10

Who tends to be penalized when interest rates are fixed?

Answer 10

The suppliers (lenders) of financial capital, who end up being repaid in dollars that are worth less due to inflation

Question 11

Indexed

Answer 11

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

Question 12

COLA

Answer 12

Cost Of Living Adjustments, intended to result in wages keeping up with inflation

Question 13

ARM / Adjustable Mortgage Rate

Answer 13

Loan used to purchase a home in which the interest rate varies with inflation. This reduces risk of higher inflation (that reduces real dollars received) for the lender, and therefore allows the lender to give the borrower a lower interest rate.