Inflation Flashcards
A basket of goods and services that is typically bought with the goods weighed by their price.
Price index
A measure of the average of the prices paid by consumers for a fixed market basket of consumer goods and services.
Consumer price index (CPI)
If the 2015 price of a market basket of goods is $900 and the base-year price for the same market basket is $500 what is the value of the consumer price index?
180 = 900 / 500 x 100
Consumer price index (CPI)
What is the formula for calculating the consumer price index?
Expenditures in the current year /expenditures in the base year * 100
True or false. A market Basket is a collection of goods that is used by a typical family.
True
What must the CPI be equal to for any designated base year?
100
Prices paid by a typical urban family of four for a fixed market basket of consumer goods and services
Consumer price index (CPI)
Inflation that includes food and energy prices
Headline inflation
Inflation that excludes food and energy prices
Core inflation
Assume the average annual CPI values for 2012 and 2013 with 205.4 and 215.7 respectively what was the percent increase in the CPI between these two years?
About 5%.
(215.7 - 205.4) / 205.4 * 100
If the CPI increase is from 125 to 150 between your one and year two then the inflation rate is what?
20%
True or false. The real wage equals the nominal wage divided by the CPI, all times 100
True
The substitution bias in the consumer price index refers to the idea that consumers _______________the quantity of products they buy in response to price. And the CPI does not reflect this and ________________the cost of the Market Basket.
Change and overestimates
Which of the following is a criticism of the CPI?
1) The market basket is changed too often
2) The market basket includes too many investment goods
3) there are too few items in the basket
4) The Market Basket is not changed often enough
The market basket is not changed often enough
The cpi tends to overstate the true inflation rate because
1) we cannot know what the true inflation rate is
2) The market basket actually selected is inappropriate
3) The Market Basket fails to weigh housing costs sufficiently
4) it feels to consider the effect of new products in the market place
It fails to consider the effect of new products in the marketplace.
The CPI does not address the basket when new products are introduced that will shift the consumption from one good to another.
Measures the price level in any year relative to some base year.
Price index
True or false. The percentage change in the CPI from one year to the next is the inflation rate.
True
The federal reserve, the US’s central bank, would like the inflation rate to be right around what percentage?
2%
A type of inflation that doesn’t cause much harm to an economy because everyone knows it is going to happen.
Anticipated
A type of inflation that causes a lot of harm to an economy because no one is expecting it.
Unanticipated
What type of inflation causes an unintended and often undesirable redistribution of income and wealth?
Unanticipated
Who often wins during times of inflation because state and federal income tax revenues tend to rise faster than the inflation rate?
Governments
True or false. Revenue from other taxes such as sales taxes and property taxes tends to leg behind inflation.
True
A decrease in the general price level of goods and services.
Deflation
True or false. Inflation reduces the real value of money over time; conversely. Deflation decreases the real value of money.
False
True or false. Inflation reduces the real value of money over time; conversely, deflation increases the real value of money.
True
True or false. During time of deflation, the value of the dollar is lower making that’s worth more.
False
True or false. If people anticipate falling prices, they will spend less because they can purchase more in the future.
True
True or false. When inflation is unanticipated, creditors find themselves holding credits that are worth more money
False
True or false. When inflation is an anticipated, creditors find themselves holding credits that are worth less money.
True
True or false. Inflammation causes a redistribution of wealth that burdens creditors.
True
Deflation is the situation in which
1) The real rate of interest is negative
2) some prices are increasing and some are decreasing
3) The rate at which prices increase falls
4) The average of all prices is declining
The average of all prices is declining
Who is most likely to be a winner during times of inflation?
1) people who hold real assets and the government
2) only the government
3) people who hold real assets
4) people on fixed incomes
People who hold real assets and the government
And unexpected reduction in inflation would tend to benefit which of the following?
1) creditors and debtors
2) creditors
3) debtors
Creditors
When inflation decreases, the value of the dollar increases, making the loan more profitable.
Unanticipated positive inflation will create
1) gains for both creditors and taters
2) losses for both creditors and debtors
3) Gains for creditors and losses for debtors
4) losses for creditors and gains for debtors
Losses for creditors and games for debtors
When inflation is unanticipated, interest rates are not adjusted for inflation and loans have lower interest rates.
Fully anticipated inflation occurs when
1) The inflation rate is equal to zero
2) The actual inflation rate is less than the anticipated inflation rate
3) The actual inflation rate equals the anticipated inflation rate
4) The anticipated inflation rate equals the unanticipated inflation rate
The actual inflation rate equals the anticipated inflation rate.
When inflation rises the same as the forecast expected, then inflation is fully anticipated.
Most of the problems caused by inflation are caused by the fact that
1) . Anticipated inflation induces people to protect themselves against inflation
2) there are no ways available for people to protect themselves against inflation
3) . Inflation is often unanticipated, and therefore comes as a surprise to individuals in the economy
4) inflation causes the purchasing power of the dollar to increase
Inflation is often unanticipated and therefore comes as a surprise to individuals in the economy.
It is hard to forecast inflation as it can be caused by unexpected events.
For most people, the problems of inflation are caused by the fact that
1) . The inflation is anticipated
2) The inflation rate causes the purchasing power of money to increase
3) . The inflation is unanticipated
The inflation is unanticipated
When inflation is unanticipated, people cannot adjust their spending decisions.
A price index that is used to adjust total output for inflation.
GDP deflator
