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Econ 104 > Quiz Two > Flashcards

Quiz Two Flashcards

1
Q

Price level

A

Measures average prices of goods and services

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2
Q

Inflation rate

A

Percentage increase in price level from year to year

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3
Q

CPI v. GDP deflator

A

GDP deflator is broad, includes every good and service . CPI can answer more specific questions about inflation

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4
Q

CPI market basket

A

211 goods and services purchased by a typical family of 4. Consists of 8 broad categories

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5
Q

Consumer Price Index definition

A

Ratio of the value of a market basket of goods and services for the typical household in a month as compares to that of the arbitrary base period

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6
Q

CPI formula

A

(Expenditures in the current year)/(Expenditures in the base year) * 100

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7
Q

Can CPI tell us how high the price level is?

A

No, only how it’s changed over time

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8
Q

Inflation

A

Percent increase between CPI values

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9
Q

Inflation rate formula

A

(Current CPI- Previous year CPI)/(Previous CPI) * 100

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10
Q

Substitution bias

A

BLS assumes people buy the same amount of each product in the market basket. In fact, consumers want the items that increase the least in price over time. Measure doesn’t account for these changes from year to year

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11
Q

Increase in quality bias

A

Recorded price increases overstate pure inflation since products improve in quality over time

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12
Q

New product bias

A

New products aren’t included in market basket updates, and prices of new products decrease in the years immediately after release

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13
Q

Outlet bias

A

Market basket stats only account for prices at traditional retailers and don’t reflect prices some consumers are paying online or at outlets

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14
Q

Problems with CPI as a measure

A

Substitution bias, increase in quality bias, new product bias, outlet bias. Can’t say how high price level is, and overstates true inflation

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15
Q

CPI adjusts for the ___ of inflation and lets us ____ dollar amounts from different years

A

Effects, compare

Ex: we can calculate what $25,000 1993 dollars equals in 2018

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16
Q

Nominal variables

A

Economic variables calculated in current year prices

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17
Q

Interest rate

A

Cost of borrowing funds, expressed as a percentage of the amount borrowed

Ex: if you loan someone $1000 at a 4% interest rate, they pay back that 4% with the amount of money borrowed

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18
Q

Nominal interest rate

A

Stated interest rate on a loan

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19
Q

Real interest rate calculation

A

Nominal interest rate - inflation rate

20
Q

How to measure nominal interest rate for the whole economy

A

Use interest rate on 3 month treasury bills, since they’re an important security in the market

21
Q

Real v nominal interest rate

A

Hard to know if nominal is high or low, but it’s always lower than real (save negative interest rates)

Real interest rate is a better measure of true cost of borrowing and return of lending

22
Q

Deflation

A

Decline in price level

23
Q

Core CPI

A

Measures CPI adjusted for food and energy prices

24
Q

Core rate of inflation

A

Measures inflation without food and energy prices, gives a better sense of inflation

25
Q

Is it possible for the whole economy to see deflation

A

Yes, especially in recessions

26
Q

True or false: if prices double overnight, wages and salaries would also double, leaving purchasing power the same

A

True

27
Q

Issues with inflation

A

Incomes don’t always rise with inflation

Those with fixed incomes are particularly hurt by inflation

28
Q

Menu costs

A

The costs to firms of changing prices. Can become quite high at high rates of inflation

29
Q

Uses of CPI

A

Measures price level for consumers

Tells how price level changes over time

Measures the cost of market basket from year to year

30
Q

Disinflation

A

Less inflation

31
Q

Connection between inflation and CPI

A

Inflation is the percent change between CPI from year to year

32
Q

Connection between inflation and interest rates

A

High interest rates = less inflation, low supply

Low interest rates = high inflation, high demand

33
Q

Bond

A

Financial security that represents a promise to repay a fixed amount of funds

34
Q

Financial security

A

States any terms under which money changes hands

35
Q

Stock

A

Financial security that represents partial ownership of a firm

36
Q

Beating the market

A

Earning a return higher than the increase in a stock market average

37
Q

Why is beating the market hard.

A

Because stock prices are extremely hard to predict as they’re based on expected future profitability of a firm

38
Q

Fiscal policy

A

A change in federal expenditures

39
Q

How is fiscal policy being used post pandemic

A

Government uses increase in federal expenditures to stimulate economic growth. Trillions were spent to fight the economic effects of covid

40
Q

Nominal price

A

The amount it takes to buy an item

41
Q

Real price definition

A

Removes inflation from a nominal price or interest rate

42
Q

Real price subtraction method

A

Percent change in nominal price/wage - inflation rate

43
Q

CPI value

A

295.3

44
Q

Real price division method

A

Price * (current CPI/base CPI)

45
Q

Federal deficit

A

Occurs when the govts spending exceeds its revenues

46
Q

Federal debt

A

Money owed to someone else, accumulation of years of deficit

Econ 104 (6 decks)

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