Price Levels and Inflation/Deflation

Question 1

Use we use price indexes to neutralize the effect of changing prices?

Answer 1

True

Question 2

What is the Consumer Price Index (CPI)

Answer 2

Relates price of goods and services during a period in a prior base period

Question 3

What is CPI-U?

Answer 3

Consumer price index for all urban consumers

Question 4

How do you calculate inflation/deflation?

Answer 4

New CPI-U LESS OLD CPI-U

CHANGE FROM CALC DIVIDED BY OLD CPI-U

EQUALS INFLATION

Question 5

What is the equation for GDP Deflator?

Answer 5

Nominal GDP / Real GDP X 100

Question 6

What is inflation?

Answer 6

Rate of increase in the price level

Deflation= Rate of decrease in the price level

Question 7

What are the causes of inflation?

Answer 7

Demand induced (Demand-Pull) inflation- Aggregate spending for goods and services exceeds production capacity

Caused:

Supply induced (cost-push) inflation- increase in the cost of inputs results in higher prices being passed on to the end user

Question 8

What are the consequences of inflation?

Answer 8

Lower wealth and real income, reduced aggregate demand

Results in higher interest rates as lenders seek to keep up with inflation