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Flashcards in Inflation Deck (19)
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1

What are the limitations to the consumer price index?

  1. Socio-economic class bias
  2. Weight and content bias
  3. Quality and novelty bias
  4. Regional bias
  5. Volatility bias
  6. Substitution bias

2

When is inflation good?

low, constant, predictable

3

inflation

increase in the average price level of goods and services in a nation over time

4

deflation

decrease in the average price level of goods and services over time

5

What does inflation cause the value of money to do?

  • decrease
  • makes money less valuable (reduces its purchasing power)

6

disinflation

decrease in rate of inflation

7

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

8

inflation index equation

current basket price / base year basket price *100

9

What is the index of the base year?

100

10

What is the effect of an increase in basket price on the value of money?

value of money decreases

11

equation to adjust for inflation (deflator)

nominal * base year index/current year index 

12

Who does inflation help?

borrowers

13

Who does inflation hurt?

lenders

people on fixed income (pensions, transfer payments - benefits)

14

nominal interest rate equation

real interest rate + anticipated inflation rate

15

What are the different types of inflation?

  • Demand-pull
  • Cost-push

16

demand-pull inflation

  • too many consumers chasing too few goods
  • average price of goods in nation rises

17

cost-push inflation

costs of production faced by a nation's producers rise (due to higher energy costs, wages, etc.) 

average price level of nation rises

 

18

What is another name for cost-push inflation?

stagflation because economy is experiencing zero or negative economic growth 

19

classical inflation

  • print too much money for too few goods
  • prices increase