Inflation and Interest Rates Flashcards
What is the aggregate price level?
A measure of the overall level of prices in the economy.
How do economists measure the aggregate price level?
By calculating the cost of purchasing a market basket of goods and services.
What is a price index?
The ratio of the current cost of a market basket to the cost in a base year, multiplied by 100.
What is the formula for calculating the price index in a given year?
Price index in a given year = (Cost of market basket in a given year) ÷ (Cost of market basket in base year) × 100.
What does CPI stand for?
Consumer Price Index
The CPI is the most common measure of the aggregate price level.
What is the primary use of the Consumer Price Index (CPI)?
To measure inflation
The CPI measures the cost of the market basket of a typical family.
What is the Producer Price Index (PPI)?
An index for goods purchased by firms
The PPI measures the average change over time in the prices domestic producers receive for their output.
What does the Producer Price Index (PPI) measure?
Average change in prices received by domestic producers
The PPI focuses on goods rather than consumer prices.
What is the GDP deflator?
A measure of the price level calculated by the ratio of nominal GDP to real GDP
It provides another way to assess inflation.
How is the GDP deflator calculated?
GDP Deflator = (Nominal GDP/Real GDP) × 100
This formula helps in understanding the changes in price level.
What is inflation?
A rising aggregate price level
What is deflation?
A falling aggregate price level
How is the inflation rate defined?
The annual percentage change in the aggregate price level
What does price stability mean?
The overall price level is changing only slowly
What does the inflation rate do?
- gives the percentage increase in the overall level of prices per year.
What does inflation do, and what doesn’t it do?
- it ruins the purchasing power of money income
- doesn’t necessarily make the people poorer if income rises as well as the prices
What does the real income measure?
- Real Wage
- Real Income
Real wage is…
the wage rate divided by the price level
Real income is…
income divided by the price level
What does Real Income give a measure of?
It provides a measure of the amount of goods and services that we can consume with a certain nominal income.
it is real income that matters for our welfare
What happens to real wages and real income if wages and income rise in line with the price level?
they stay the same
