chapter 5 econ
______ measures the cost of a fixed basket of goods and services
CPI
inflation rate can be calculated as the percentage change in
CPI
the measure of the cost of a standard basket of goods and services in any period relative to the cost of the same basket of goods and services in the base year is called the
consumer price index
is the rate of increase of all prices except energy and food
core rate of inflation
for a given nominal interest rate, an unexpectedly HIGH inflation rate _____ the real interest rate
decreases
the situation when the price of most goods and services are falling over time is called
deflation
unexpectedly high inflation _____ borrowers and ______ lenders
helps, hurts
it is difficult to engage in long-term financial planning when inflation is
high and erratic
to obtain a given real rate of return, lenders must charge a ______ nominal interest rate in the face of increasing inflation
higher
an extremely high rate of inflation is called
hyperinflation
a real quantity is a quantity measured
in physical terms
to ensure that a nominal payment represents a constant level of purchasing power over time, one should
increase it by a percentage equal to the rate of inflation for that year
for a given nominal interest rate, an unexpectedly LOW inflation rate ____ the real interest rate
increases
to ensure that your salary maintains its real purchasing power from year to year, your nominal salary must be
indexed
the practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index is called
indexing
two methods used to adjust nominal values for inflation are
indexing and deflating
the real costs of inflation to society include
interference with long term planning
the substitution bias in the CPI arises because the CPI
is based on a fixed basket of goods and services
over time, the core rate of inflation should be ______ than the general rate of inflation
more stable
a quantity measured in terms of current dollar value is called _______ quantity
nominal
real interest rate equals
nominal - inflation rate
annual percentage increase in the dollar value of financial asset
nominal interest rate
inflation______ the signals sent by price changes to demanders and suppliers of goods and services
obscures
when consumers substitute a cheaper good for a more expensive one, the CPI will _____ the change in the cost of living
overstate
when statisticians fail to take into account improvements in the quality of goods and services, the CPI will tend to _____ the rate of inflation
overstate
a measure of the average price of a given class of goods or services relative to the price of the same goods and services in a base year is called a
price index
a measure of overall prices at a particular point in time
price level
the annual percentage rate of change in the price level is the
rate of inflation
annual percentage increase in the purchasing power of a financial asset
real interest rate
the wage paid to workers measured in terms of real purchasing power is called the
real wage
when inflation turns out to be different from what was expected, purchasing power is
redistributed
the "true" costs of inflation are
reduced economic growth and efficiency
the price of a specific good in comparison to the prices of other goods and services
relative price
the extra costs incurred to avoid holding cash when there is inflation are called the
shoe leather costs
two types of bias that tend to cause the CPI to overstate the "true" rate of inflation are
substitution and quality adjustment
the quality adjustment bias of the CPI refers to the failure of statisticians to
take into account improvements in goods and services
the tendency for nominal interest rates to be high when inflation is high and low when inflation is low is known as
the fisher effect
