Mod 14-15 Flashcards

1
Q

real wage =

A

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

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2
Q

real income

A

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

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3
Q

Inflation rate =

A

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

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4
Q

Inflation

A

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

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5
Q

“real”

A

adjusted for inflation

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6
Q

“nominal”

A

not adjusted for inflation

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7
Q

Shoe-leather costs

A

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

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8
Q

menu costs

A

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

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9
Q

Unit of Account costs

A

come from inflation making money a less reliable unit of measurement

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10
Q

phantom gains

A

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

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11
Q

interest rate

A
  • 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
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12
Q

nominal interest rate

A

interest rate ACTUALLY paid for loan

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13
Q

real interest rate =

A

interest rate - rate of inflation

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14
Q

who is helped by inflation?

A

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

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15
Q

Who are hurt by inflation?

A

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

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16
Q

disinflation

A

process of bringing down the inflation rate

17
Q

aggregate price level

A

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.

18
Q

price index

A

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

19
Q

market basket

A

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

20
Q

price index

A

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

21
Q

Price index in a given year =

A

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

22
Q

in the base year prices …….

A

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

23
Q

Consumer Price Index

A

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

24
Q

Substitution Bias

A

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

25
Producer Price Index
"early warning signal" b/c energy is raised first :measures the price of goods and services purchased by consumers
26
GDP Deflator =
(nominal GDP / real GDP ) X 100 *ignores input prices
27
What happened to the economy during the Great Depression?
Deflation
28
What happened to the economy during WWII?
Inflation
29
Circular Flow in the context of inflation
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
30
Nominal Interest rate (rate ACTUALLY paid) =
real interest rate (actual return) + expected inflation rate
31
Who are the biggest lenders?
Householders! they put their money in bank accounts!
32
Who gets money in inflation
the government gets money while the value of our money decreases
33
5 categories of unemployment
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
34
inflation
- misallocation of resources due to rising price level - erodes value of financial assets