Inflation Flashcards
What is core CPI?
CPI is a rate of inflation on a basket of goods. Core CPI ignores food and energy prices (volatile commodities).
How does headline inflation compare to core CPI?
Headline inflation overreacts to short-term fluctuations. Core CPI is used more for longer term outlook.
How do the Laspeyres and Paasche Index differ? Why was the Paasche index developed?
Laspeyres uses base level quantities against changes in price over time, whereas Paasche index uses latest period quantities against changes in price over time. Paasche was developed to address substitution bias in the Laspeyres approach.
What is the formula for inflation price index?
latest index price / initial index price
What is the Fisher Index formula?
It is the geometric mean of the Laspeyres and Paasche Index prices (product square root).
What is the relationship between nominal inflation rate, real inflation rate and expected inflation?
Real inflation rate = nominal inflation rate - expected inflation.
What two factors lead to cost-push inflation? What two factors lead to demand-pull inflation?
Cost-push = increasing wages, rising commodity prices Demand-pull = increase money supply, increase capacity utilization.
how do price levels and inflation rate differ in the following situations? Inflation, Disinflation, deflation, hyperinflation, stagflation
(price level, inflation rate): Inflation = rising, positive ; Disinflation = rising slower rate, positive and decreasing ; deflation = falling, negative ; hyperinflation = both rapidly increasing ; stagflation = rising, highly positive (unemployment and slowing economy).
How is stagflation depicted on output curves?
SRAS shifting left.
What are the costs of expected inflation and unexpected inflation?
Expected = menu costs and shoe-leather costs Unexpected = wealth transfer (borrowers and lenders), more expensive borrowing (uncertainty) and reduced information content of market prices.
