Measuring the Price Level and Inflation

Question 1

Consumer Price Index

Answer 1

• Way to measure the average price level of products in an economy
• Measures the average change in prices for private consumption
• Often used by central banks to target inflation

CPI = Cost of Base Year Basket in Current Year / Cost of Base Year Basket in Base Year

Question 2

Inflation

Answer 2

(CPIt - CPIt-1) / CPIt-1

Question 3

Difference between Deflation and Deflating?

Answer 3

• Deflating is when we have a nominal quantity, when the change of price level is negative. E.g., Farmers getting less for their products.
• Deflation is when inflation is negative. State when prices of most goods and services fall over time.

Question 4

Hyperinflation

Answer 4

• A situation in which the inflation rate is extremely high.

Question 5

Nominal Interest Rate (i)

Answer 5

Real Interest Rate (r) + Inflation (pi)

• The annual percentage increase in the nominal value of a financial
  asset. Not adjusted for inflation

Question 6

Real interest rate (𝑟)

Answer 6

The annual percentage increase in the purchasing power of a

financial asset. Adjusted for inflation