What are the limitations to the consumer price index?
- Socio-economic class bias
- Weight and content bias
- Quality and novelty bias
- Regional bias
- Volatility bias
- Substitution bias
When is inflation good?
low, constant, predictable
increase in the average price level of goods and services in a nation over time
decrease in the average price level of goods and services over time
What does inflation cause the value of money to do?
- makes money less valuable (reduces its purchasing power)
decrease in rate of inflation
consumer price index (CPI)
- measures the prices of consumer goods and services
- measures changes in the price level of the products that a typical household may buy in a particular time period
inflation index equation
current basket price / base year basket price *100
What is the index of the base year?
What is the effect of an increase in basket price on the value of money?
value of money decreases
equation to adjust for inflation (deflator)
nominal * base year index/current year index
Who does inflation help?
Who does inflation hurt?
people on fixed income (pensions, transfer payments - benefits)
nominal interest rate equation
real interest rate + anticipated inflation rate
What are the different types of inflation?
- too many consumers chasing too few goods
- average price of goods in nation rises
costs of production faced by a nation's producers rise (due to higher energy costs, wages, etc.)
average price level of nation rises
What is another name for cost-push inflation?
stagflation because economy is experiencing zero or negative economic growth