week 15

Question 1

what is consumer price index

Answer 1

measure of the cost of living during a particular period
measures cost of a standard basket of goods and services in a given year
relative to the cost of the same basket of goods and services in the same year
base year changes periodically

Question 2

what is a price index

Answer 2

measures the average price of a given quantity of goods and services relative to the price of the same goods and services in a base year

Question 3

what is inflation

Answer 3

measures how fast the average price level is changing overtime

Question 4

what is rate of inflation

Answer 4

the annual percentage rate of change in the price level

Question 5

what is deflation

Answer 5

a situation in which most goods or services are falling over time, so that inflation is negtaive

Question 6

what is a nominal quantity

Answer 6

measured in terms of its current dollar value

Question 7

what is a real quantity

Answer 7

measured in physical terms

Question 8

how do you convert a nominal quantity to its real quantity

Answer 8

deflate it
divide a nominal quantity by its price index to express the quantity in real terms

Question 9

what are real wages

Answer 9

the wage paid to the worker measured in terms of purchasing power

Question 10

what is indexing

Answer 10

increases nominal quantity each period by the percentage increase in a specified price index
automatically adjusts certain values such as social security payments by the amount of inflation

Question 11

what is minimum wage

Answer 11

national minimum wage set by gov
increasing minimum wage can contribute to inflation
companies pass on increased labour costs to consumers in the form of higher prices

Question 12

what is a tight labour markets

Answer 12

a stituation where there is a low level of unemployment and a high level of job vacancies, few workers to fill jobs
causes employers to compete for workers, pushes up wages
increases cost of goods for customers
also causes increased consumer spending as people have more money to spend
sign of a strong economu

Question 13

what is a tight labour markets

Answer 13

a situation where there is a low level of unemployment and a high level of job vacancies, few workers to fill jobs
causes employers to compete for workers, pushes up wages
increases cost of goods for customers
also causes increased consumer spending as people have more money to spend
sign of a strong economy

Question 14

how can inflation be overstated

Answer 14

CPI can influence policy decisions
unnecessary increases in gov spending
CPI may overstate cost of living as it is based on a fixed basket of goods
CPI doesn’t account for changes in quality

Question 15

what are CPI bias changes

Answer 15

CPI measures price changes not quality changes
adjusting for quality is difficult - large numbers of goods and subjective differences
incorporating new goods is difficult, no base price for this years new goods

Question 16

what are CPI biases

Answer 16

CPI uses a fixed basket of goods
when price of a good increases, consumers buy less and substitute other goods
failing to account for substitution overstates inflation and CPI

Question 17

what is a GDP price deflator

Answer 17

measures changes in prices for all goods and services
helps compare real economic activity year on year
helps identify how much prices have inflated over a specific time period

Question 18

what is the formula for the GDP price deflator

Answer 18

nominal GDP / real GDP x 100

Question 19

what is the difference between GDP price deflator and CPI index

Answer 19

CPI based on fixed basket of goods, misses changes in prices of goods outside basket
GDP isn’t based on fixed basket of goods
changes in consumption patterns or introduction of new goods and services are automatically reflected in deflator

Question 20

what is price level

Answer 20

a measure of the overall level of prices at a particular point in time as measured by a price index such as CPI

Question 21

what is relative price

Answer 21

the price of a specific good or service in comparison to prices of other goods and services
increasing relative price encourages consumers to save money on expensive products and search for their substitutes while companies try to bring more products to the market to gain profit

Question 22

what are the observations about cost of inflation

Answer 22

changes in price do not imply significant inflation
inflation can be high without effecting prices
to counteract price changes, gov policy would have to affect the market for specific goods
to counteract inflation, gov uses monetary and fiscal policy

Question 23

how do taxes cause distortions

Answer 23

is they are not indexed the distort incentives for people to work, save and invest
lower savings and investment means lower economic growth
income tax treats nominal interest earned on savings as income
after-tax real interest rate falls, making saving less attractive

Question 24

how does inflation increase the cost of cash

Answer 24

without inflation, cash holds value overtime
when inflation is high, cash loses value
people withdraw cash more frequently, increases processing costs for banks, real cost of inflation

Question 25

what is unexpected redistribution of wealth

Answer 25

unexpected inflation redistributes wealth
suppose workers salaries are not indexed and inflation is higher, salaries lose purchasing power, employers gain at expense of workers
unexpectedly high inflation benefits borrowers at the expense of lenders

Question 26

how does inflation interfere with long term planning

Answer 26

makes planning risky
economists agree that low and stable inflation promotes a healthy economy

Question 27

what are menu costs

Answer 27

costs of adjusting prices
during inflation, necessary to update price lists and posted prices
prices adjust with delay

Question 28

what is real interest rate

Answer 28

the annual percentage increase in purchasing power of financial assets

Question 29

what is nominal interest rate

Answer 29

annual percentage increase in the dollar value of an asset

Question 30

what is the fisher equation

Answer 30

real interest rate = nominal interest rate - inflation

Question 31

what is the fisher effect

Answer 31

tendency for nominal interest rates to be high when inflation is high and low when inflation is low

Question 32

what are inflation-protected bonds

Answer 32

pay a real rate of interest plus the inflation rate

Question 33

what is demand-pull inflation

Answer 33

gov increases spending, increases demand for goods and services which can lead to higher prices
if supply cannot keep up, prices increase causing inflation

Question 34

what is monetary inflation

Answer 34

increase in money supply causes a decline in value of money, can cause inflation

Question 35

what is stagflation

Answer 35

when an economy experiences high inflation and stagnant economic growth at the same time
occurs when there are supply side shocks to the economy eg increase in oil prices

Question 36

how do you reduce stagflation

Answer 36

monetary and fiscal policy can be less effective
need to ease consumer demand without falling into a recession

Question 37

what was hyperinflation in germany

Answer 37

fell behind with reparation payments
chose to print more banknotes, caused money to become worthless
prices increased rapidly