price stability chapter 20 Flashcards
price stability
a low and stable inflation rate
inflation rate
the percentage rise in an economy’s price level over a period of time. it can be the change in average prices form one month to the next month, or from one quarter to the next quarter of the year
inflation
a sustained increase in an economy’s price level over a period of time. prices, on average, are rising at a particular rate
barter
direct exchange of goods and services for other goods and service
low and high inflation rates
low inflation rate is what governments want to experience stable inflation rate. high inflation rate cause price levels to increase at a significant percentage.
fluctuations in price levels
countries can experience large fluctuations in price level. at certain times, some countries experience a fall in their price level
price level
the average of all prices in an economy. when the price level increases the value of money falls and its purchasing power declines. each unit of the currency will buy less
creeping inflation
a low rate of inflation
hyperinflation
a very high of inflation, which may result in people losing confidence in the currency
creeping inflation
a low rate of inflation
hyperinflation
a very high rate of inflation, which may result in people losing confidence in the currency. considered to be an inflation rate that exceeds 50% a month. occurs when inflation goes out of control
what can firms do when there is a steady rise in prices
a low inflation rate can encourage firms to produce more
what does hyperinflation result in
results in people resorting to barter, exchanging goods and services for other goods and services instead of using money to buy and sell products
how to reverse hyperinflation
the currency has to be replaced by a new currency unit
deflation
a sustained fall in the price level. involve a negative inflation rate
disinflation
a fall in the inflation rate
what does deflation result in
it results in a rise in the value of money, with each currency unit having greater purchasing power
ways to compare inflation rate
the annual average method and year-on-year method
ways to compare inflation rate: the annual average method
a way of calculating the inflation rate by comparing the average level of prices during a twelve-month period with the average level in the previous twelve months.
ways to compare inflation rate: the year on year method
a way of calculating the inflation rate by comparing the percentage change in price level for a given month with that of the same month of the previous year.
consumer price index (CPI)
a measure that shows the average change in the prices of a representative basket of products purchased by households.
what does a country’s price indicate
A country’s price level indicates how much it costs to live in that country. A rise in the price level means that the cost of living has increased. To assess changes in the cost of living, governments construct a consumer price index (CPI).
how do governments construct a consumer price index
select a base year
carry out a survey to find people’s spending patterns
attach weights to the different categories
find out price changes
multiply weights by price changes
steps to constructing a CPI: select a base year
This is usually a year in which nothing unusual has occurred. The base year is given a value of 100. The base year is changed regularly.