Mod 14-15

Question 1

real wage =

Answer 1

wage rate / price level
:to adjust for inflation or deflation effects

Question 2

real income

Answer 2

income/ price level
:to adjust for effects of inflation or deflation

Question 3

Inflation rate =

Answer 3

[(price level in yr 2 - price level in yr1) / price level in yr 1] X 100

Question 4

Inflation

Answer 4

increase in the general price level that causes the real value of money to decrease: the dollar is worth less

Question 5

“real”

Answer 5

adjusted for inflation

Question 6

“nominal”

Answer 6

not adjusted for inflation

Question 7

Shoe-leather costs

Answer 7

increased costs of transactions caused by inflation
-high inflation: don’t save money! purchasing power decreased
-shoes get worn out from running to banks to move around money

Question 8

menu costs

Answer 8

real costs of changing list prices
-workers spend time assigning new price stickers and updating computer systems

Question 9

Unit of Account costs

Answer 9

come from inflation making money a less reliable unit of measurement

Question 10

phantom gains

Answer 10

money that is lost to inflation but taxed anyway because appears to be a profit

Question 11

interest rate

Answer 11

• a fixed interest rate is created based off of expected inflation
  :percentage of loan amount that the borrower must pay to lender in addition to loaned amount

Question 12

nominal interest rate

Answer 12

interest rate ACTUALLY paid for loan

Question 13

real interest rate =

Answer 13

interest rate - rate of inflation

Question 14

who is helped by inflation?

Answer 14

borrowers: inflation decreases the real value of what to pay back on their loans

Question 15

Who are hurt by inflation?

Answer 15

lenders, savers, and people with fixed income: the value of the money they are getting/ have is decreasing

Question 16

disinflation

Answer 16

process of bringing down the inflation rate

Question 17

aggregate price level

Answer 17

measure of the overall level of prices in an economy
The price level compares the price of the market basket of goods in a given year to its price in the base year.

Question 18

price index

Answer 18

avg. price change: track changes in a consumer’s price bundle

Question 19

market basket

Answer 19

a hypothetical set of consumer purchases of good and services calculated relative to base year

Question 20

price index

Answer 20

measures the cost of purchasing a given market basket in a given year. The index value always equal to 100 in the base year

Question 21

Price index in a given year =

Answer 21

(cost of market basket in a given year / cost of market basket in base year) X 100

Question 22

in the base year prices …….

Answer 22

are 100% of what they are in the base year so CPI in base year is always 100

Question 23

Consumer Price Index

Answer 23

measures the cost of the market basket of a typical American family (logarithmic scale) surveys 23000 retail outlets in 87 cities

Question 24

Substitution Bias

Answer 24

occurs in the CPI because overtime items with prices that have risen most receive too much weight (b/c households substitute away from them) while items with prices that have risen least are given too little weight ( b/c households shift their spending toward them)
3 Causes:
1. Consumers alter spending
2. new items
3.product improvements

Question 25

Producer Price Index

Answer 25

“early warning signal” b/c energy is raised first
:measures the price of goods and services purchased by consumers

Question 26

GDP Deflator =

Answer 26

(nominal GDP / real GDP ) X 100
*ignores input prices

Question 27

What happened to the economy during the Great Depression?

Answer 27

Deflation

Question 28

What happened to the economy during WWII?

Answer 28

Inflation

Question 29

Circular Flow in the context of inflation

Answer 29

prices paid to firms for goods and services –> paid more money revenue increases.
1. wages or rent increases
OR
2. profits increase –> dividends go back to the people

Question 30

Nominal Interest rate (rate ACTUALLY paid) =

Answer 30

real interest rate (actual return) + expected inflation rate

Question 31

Who are the biggest lenders?

Answer 31

Householders!
they put their money in bank accounts!

Question 32

Who gets money in inflation

Answer 32

the government gets money while the value of our money decreases

Question 33

5 categories of unemployment

Answer 33

1. structural unemployment: out of work b/c location and bad structure of economy
2. seasonally unemployed: in the off-season
3. cyclically unemployed: recession
4. frictionally unemployed: rentering, graduate, quit job
5. part time: ur still fully counted as employed
6. NOT COUNTED: discouraged workers: hidden unemployed

Question 34

inflation

Answer 34

• misallocation of resources due to rising price level
• erodes value of financial assets