Inflation- The Cost of Living Flashcards
Nominal measure
hasnt been adjusted over time
real measure
has been adjusted for price changes over time
preferred measure
real measures, depict changes over time
inflation
occurs when economy’s overall price level is rising
deflation
occurs when economy’s overall price level is falling
inflation rate
percent change in prices from one time period to another
consumer price index
overall cost of goods and services bpught by the typical consumer, moniters changes in the cost of living over time
cpi rises
family has to spend more to maintain same quality of life
changes in cpi measured by
how much more or less a typical family would have to spend to purchase their previous basket
fix the basket
determine what goods and services are most important to the typical urban consumer
find the prices
find the prices of goods and services in the basket for the base year
compute index
divide price of basket in one year by price in base year and multiply by 100
calculate inflation rate
cpi in y1-cpi in y2/cpi in y1 x100
demand pull inflation
spending increases faster than production
cost push inflaton or supply side inflation
prices rise because of a rise in production cost
quantity theory
too much money in an economy causes inflation
who is hirt and helped by unanticipated inflation
fixred income groups hirt because their real income suffers
savers hurt because interest rate returns may not cover cost of inflationlenders hurt because they are paid back cheaper dollars
debtors helped
inflation premium
amount that interest rate is raised to cover effects of anticipated inflation
CPI overstates rate of inflation
substitution bias
intro of new goods
unmeasured quality changes
sub bias
basket doesnt change to reflect consumer reactions to price changes(buy cheaper good w prce raises)
intro of new goods
basket doesnt reflect imprvement of goods that makes dollars more valuable
unmeasured quality changes
quality changes unmeasured
producer price index
measures cost of a basket purchased by firms
GDP deflator
nominal gdp/real gdp x100
GDP defltor vs cpi
gdp- price of all goods and services produced domestically
cpi- prices of goods and services bought by customers
rule of 70
we can find doubling time by dividing percentage increase into 70
3% doubles in 23 yrs
70/3=23
calculate real income
nominal income this yr/cpi this yr x100
adjust wages from previous yr to urrent yr
cpi frm this yr/ cpi from previous yr x [revious yr income