Module 14

Question 1

real wage

Answer 1

wage/price level

shows actual purchasing powee

Question 2

inflation rate

Answer 2

percent increase in the overall level of prices per year

= PL in yr 2 - PL in yr 1 / PL in yr 1

Question 3

shoe leather costs

Answer 3

increased costs of transaction caused by inflation (people replace cash with something that will hold its value, thus making many inefficient trips to the bank)

Question 4

menu costs

Answer 4

real costs of raising or changing the listed prices, which occurs more frequently during inflation (uses labor resources)

Question 5

unit of account costs

Answer 5

costs arising from the way inflation makes money a less reliable unit of measurement for economic decisions.
highest in tax system

Question 6

phantom gain

Answer 6

the supposed capital gain that is actually only due to inflation, causes high unit of account costs in tax systems
discourages productive investment spending

Question 7

interest rate

Answer 7

% of the loan amount borrowers must pay to the lender in addition to the loan repayments

Question 8

nominal interest rate

Answer 8

interest rate not adjusted for inflation

Question 9

real interest rate

Answer 9

nominal interest rate - inflation rate

–> if inflation rate is higher than expected, borrowers win and lenders loose

Question 10

disinflation

Answer 10

the difficult and costly process of bringing the inflation rate down