Inflation and Price Indicies

Question 0

Deflation

Answer 0

A sustained decrease in price level.

Question 1

Inflation

Answer 1

A sustained increase in overall price level.
Effects:
1) Menu Costs
2) Fixed incomes don’t adjust
3) interest payments don’t increase. This hurts lenders and helps borrowers
4) Social tensions due to uncertainty about redistribution of income

Benefits:
1) borrowers benefit

Question 2

Nominal

Answer 2

Refers to the amount of money not adjusted for inflation. This is the actual number of dollars

Question 3

Real

Answer 3

Real refers to money and its actual purchasing power. This is adjusted for inflation

Question 4

Money Illusion

Answer 4

The mistake of noting increase in Calvary but not increase in general prices.

Question 5

CPI

Answer 5

Consumer Price Index is the governments gauge of inflation. It is use to adjust tex brackets, ect.

CPI= (Cost of market basket in current year/ cost of market basket in base year) x 100

Can overestimate inflation due to dependency on base year prices. It does not account for substitutions for less/more expensive goods. Also doesn’t account for quality changes and new products.

Question 6

Inflation with CPI

Answer 6

Z being the more recent year…

Inflation= [(CPI year Z/ CPI year Y)-1] x 100

Question 7

Real GDP using Nominal GDP and CPI

Answer 7

Real GDP=( Nominal GDP/ CPI for same year) x 100

Question 8

PPI

Answer 8

Producer price index is like like the CPI but applies to intermediate goods like lumber or steel. Often a good predictor if future inflation

Question 9

GDP Deflator

Answer 9

Producer price index is like like the CPI but applies to intermediate goods like lumber or steel. Often a good predictor if future inflation