Macroeconomics: Price Levels (Inflation) & Fiscal/Monetary Policy Flashcards
What is the primary purpose of consumer price index (CPI)?
Measure and compare relative price changes over time. It does so by relating prices paid for a basket of goods and services during a period to the prices of those goods and services in a prior base period.
The strength of an economic recovery would be measured primarily by what?
Real GDP
What indicator does the federal government use to measure inflation?
Consumer Price index (CPI)
What is inflation and deflation?
Inflation - annual rate of increase in the price level
Deflation - annual rate of decrease in the price level
What is CPI-U?
The Consumer Price Index for all urban consumers (CPI-U) is the most common yardstick used by the federal government to measure inflation or deflation in the U.S.
The CPI-U measures the change in the price of a “basket” of consumer goods and services over time. The rate of change in that price measures inflation (or deflation).
What is consumer confidence index (CCI)?
Measure the confidence of consumers in the economic outlook.
Between wages, sales, interest expense, and depreciation, which one of these would inflation not have an impact on?
Depreciation. Depreciation does not reflect current fixed-asset replacement costs. Depreciation is the systematic and rational allocation of long-term assets over the period benefited. Thus, depreciation (expense) reflects the portion of the historical cost of the asset allocated to the current period.
Why are wages, sales, and interest expenses reflective of current rates?
Wages reflect current labor rates. Sales reflect current product prices. Interest expense reflect current borrowing rates. All of these are recognized in the current period at the current rates. Inflation causes each one of these to increase.
What is the formula to calculate percentage changes for account balances? This would be use to compare to different years.
(Current balance - prior balance) / prior balance.
What is the formula to calculate for GDP Deflator?
(Nominal GDP/Real GDP)x100= GDP Deflator
How do you solve for Nominal GDP, Real GDP, or GDP Deflator?
Use GDP deflator formula and solve for the particular variable you are trying to determine. For example, if you need to solve for real GDP, but are given Nominal GDP or GDP Deflator, use the formula to solve for real GDP.
Why would someone on fixed income be impacted and hurt by increase in inflation?
An increase in inflation will result in goods and services costing more and, because the increase is unanticipated, consumers would not have prepared by adjusting investments or spending patterns. This person won’t be able to consume as many goods & services with inflation increases.
Which of the following is correct regarding the Consumer Price Index (CPI) for measuring the estimated decrease in a company’s buying power?
The products a company buys should differ from what a consumer buys. The Consumer Price Index (CPI) measures the change in price over time of a representative “basket” of goods and services purchased by consumers, not by companies.
When given principal amount, interest rate, and inflation rate, how do you determine the worth of something after inflation?
Formula: Principal + Interest Amount (Interest rate x principal)/Inflation rate + 1
When consumer prices increase because of increases in aggregate demand, what also increases as well/
Quantity of output.
How does deflation impact interest rates?
Decreases interest rates
What does producer price index measure?
The price of a basket of commodities at the point of the first commercial sale. It measures the combined price of a selected group of goods and services for a specified period in comparison with the combined price of the same or similar goods for a base period.
How does inflation effect price and purchasing power?
Increases price. Reduces purchasing power.
What does GDP include?
The total monetary value of all final goods and services produced within a nation in one year.
What are some characteristics of a deflationary economy?
- Potential GDP > Actual GDP
- Low Interest rates
- Consumers are hesitant to make purchases w/ declining prices
- Companies are hesitant to make investments