Price Levels and Inflation

Question 1

Define “inflation” and “deflation”.

Answer 1

Inflation = the rate of increase in the price level.
Deflation = the rate of decrease in the price level.
In the U.S., most commonly measured by the CPI-U.

Question 2

Identify three common price indices.

Answer 2

Consumer Price Index (CPI);
Wholesale Price Index (WPI);
Gross Domestic Product (GDP) Deflator.

Question 3

Define “price indexes (or indices)”.

Answer 3

Factor that converts prices of each period to what those prices would be in terms of prices of a specific prior (or subsequent) reference period.

Question 4

What causes demand-induced (or demand-pull) inflation?

Answer 4

Results when aggregate spending for goods and services exceeds the productive capacity of the economy at full employment.

Question 5

What causes supply-induced (or cost-push or supply-push) inflation?

Answer 5

Results from increases in the cost of inputs to the production process which are passed on to the final buyer in the form of higher prices.

Question 6

What are the consequences of inflation?

Answer 6

Lower current wealth and lower future real income;
Higher interest rates;
Uncertainty of economic measures.