Quiz 2 (P.18-32) Flashcards
Define the Consumer Price Index (CPI) and how it is represented.
The CPI is an indicator of the change in the general level of prices of consumer goods and services. It is represented by a number.
How is the CPI/ Price Index/ Price level calculated?
It is calculated by calculating the total cost of a fixed basket of goods in the base year and then, by using the same quantity, calculating the total price for every other year. Then, divide a given year/ base year X 100.
How is rate of growth represented?
%Δ
How is rate of growth calculated?
Present/Past X 100
What does IPPI stand for?
Industrial Product Price Index
What does the IPPI measure?
IPPI measures the change in the general level of prices of goods and services that firms buy.
What is the “Deflator” also known as?
The deflator is also known as the GDP Implicit Price Deflator Index.
What does the Deflator represent?
The Deflator represents the average of all prices of everything in GDP and GNP.
When we say the inflation rate, we mean the…
Rate of growth (%Δ) of the Price Index/Price Level/ CPI
Inflation is when the rate of growth is:
Positive
Deflation is when the rate of growth is:
Negative
The degrees of severity of inflation are (5):
Deflation (-0%), Creeping inflation (0-9.99.%/year), Double-Digit inflation (10+/year), Galloping inflation (20-60%/year), and Hyper-Inflation (600%/year)
How often is double-digit inflation visible?
Every month
How often is galloping inflation visible?
Every week or day
How often is hyper-inflation visible?
Every hour of every day
What is the inflation rate of a healthy economy?
A healthy economy should have between 1-3% inflation/per year.
Why is unanticipated inflation a bad thing?
Unanticipated inflation means that there is now uncertainty therefore people will change their behaviours to protect the purchasing power of their money.
What are the causes of inflation (3)?
Excess demand/spending, supply shocks and excessive increases in the supply of money caused by govern’t debt
What happens when prices rise at unpredictable rates?
Spending accelerates, which then makes firms produce more goods and services (economic expansion)
When the employment rate begins to approach natural rate of unemployment, what happens that causes inflation?
When the unemployment rate begins to approach natural rate of unemployment, it means more workers are hired and eventually, there will be a shortage of skilled workers and materials so costs will rise and then inflation occurs. Then, spending accelerates.
Will firms expand when inflation is occurring?
No, firms will not expand because it would be too risky at this time. They use their existing facilities because they are uncertain how long excess demand will last.
What can be done to help problem of excess spending?
Policy solutions may be put in place.
What is the source of job growth in the economy?
Business investments
What are the effects of excess-demand inflation on the whole economy?
Savings in the banks fall, interest rates rise and then investments fall.
