Finc Mgmt A3 - Inflation/Deflation Flashcards
When you borrow money from a bank that will be repaid in one year and the inflation rate goes to 10% then
the dollars that you repay will have less purchasing power than those you borrowed from the bank.
Consumer Price Index (CPI)
- benchmark inflation guide
- applies to consumer basket of goods
- rises in CPI signal inflation
- drops in CPI signal deflation
Producer Price Index (PPI)
measures the average change over time in the selling prices received by domestic producers for their output and that purchasers pay for their inputs and thus is the appropriate index for measuring the decrease in a company’s purchasing power
Inflation is measured by
- CPI
- GDP deflator
- Wholesale Price Index (WPI)
Inflation distorts reported income because
Depreciation is not reflective of current fixed-asset replacement costs
The Federal government measures inflation using the indicator
CPI
During a _________ period, prices generally increase the fastest
Hyperinflation
A rise in price levels may result when costs of raw materials or labor increase. This type of price increase is called ________ inflation.
Cost-push
To convert a dollar amount from one price level to another =
$ x (price level converting to / price level going from)
Percentage change =
(New - Old) / Old
A likely result as the economy reaches full employment is
Inflation.
Demand rises and usually causes increased price levels
Extrapolating the _____ is often used as an estimate of future prices since it is more stable than the _______
CPI more stable than the PPI
CPI Formula =
[RETURN TO]
Federal Budget deficit is
the amount by which the federal government’s expenditures exceed its revenues in a given year
National Debt is
the total accumulation of the federal government’s surpluses and deficits
Aggregate Gov Budget Deficit is
the excess of state, local, and federal spending over their revenues
Negative Fund Balance is
the amount by which liabilities exceed assets on the federal government’s balance sheet
The acknowledged preventive measure for a period of deflation is
increasing the money supply
The Steelworkers Union argued that the standard-of-living for union members had declined through the life of the recently expired contract. The management negotiating team replied that this was not true since workers had received a 3% wage increase in each year of the 3-year contract. Could the union assertion be true?
Yes, because the workers’ real income might fall if price increases are proportionally greater than the wage increases received by the workers. Even though the workers received a 3% annual increase in their nominal wages, their real income (standard-of-living) could have declined if inflation had averaged more than 3% annually during the contract period.
A reliable early predictor of inflation is
the Wholesale Price Index (WPI)
