Economics 101 - Chapter 7 - Inflation

Real income

Income in constant dollars; nominal income adjusted for inflation.

hyperinflation

Inflation rate in excess of 200 percent, lasting at least one year.

Which of the following best describes the nominal interest rate?

Interest rates that are quoted in the market

______ illusion refers to the use of nominal income rather than real income to gauge changes in wealth

Money

_____ income will be affected if the change in the price level differs from the change in a person's nominal income

Real

With an adjustable-rate mortgage, if the rate of inflation jumps, then the nominal rate on the mortgage will

Rise

price stability

The absence of significant changes in the average price level; officially defined as a rate of inflation of less than 3 percent.

Nominal income

The amount of money income received in a given time period, measured in correct dollars.

inflation rate

The annual percentage rate of increase in the average price level; (Price Level Year 2 − Price Level Year 1)/Price Level Year 1.

bracket creep

The movement of taxpayers into higher tax brackets (rates) as nominal incomes grow.

Item Weights

The percentage of total expenditure spent on a specific product; used to compute inflation indexes.

The CPI relies on the calculation of:

The prices of a fixed basket of goods that changes every year.

The GDP deflator is the price index used to

adjust nominal GDP statistics for changing price levels.

In the short run, however, the PPIs usually increase before the CPI

because it takes time for producers' price increases to be reflected in the prices that consumers pay.

The redistributive effect of inflation impacts:

fixed income groups, lenders with fixed interest rate loans.

If the CPI in a given year is recorded as 208, then we can say that the market basket of items purchased by the typical consumer

has more than doubled since the base year

Changes in real GDP are a good measure of

how output and living standards are changing. Nominal GDP statistics, by contrast, mix up output and price changes.

The CPI includes the prices of approximately ______ specific items that are gathered every month

180

If relative prices are changing, we can definitely state that:

some prices may be rising and some may be falling a particular good's price has become more or less expensive in comparison to other goods.

Hyperinflation is often fueled by

speculation

The annual percentage rate of increase in the average price level is called

the inflation rate

the goal of "full employment" was defined as

the lowest rate of unemployment consistent with stable prices

relative price

the price of one good in comparison with the price of other goods

The use of money as a common denominator to sum output into a meaningful measure of GDP creates a problem because:

the value of money itself changes

Three Producer Price Indexes

Crude materials Intermediate goods Finished goods

Which of the following are the three redistributive effects of inflation?

Price effects, Income effects, wealth effects

Supposed you have a wage contract stipulating you get $50,000 annual nominal income starting this year (year 1). Assume inflation is 3%. What is the real value of your wages in two years (year 3)?

$47,130 Year 2 real income = (nominal income)/(1 inflation rate), compounded annually = $50,000 / (1.03) = $48,544. Year 3 income = $48,544/(1+.03) = $47,130

Supposed Fran's nominal and real incomes have both risen, the former by 7% and the latter by 3%. In this case, it can be deduced that inflation was

4%

if the inflation rate is 3% and the real interest rate is 5%, then the nominal interest rate is:

8%

Supposed the CPI was 120 last year and is 130 this year. The 1 year inflation rate equals

8.3% (CPI this year - CPI last year) / CPI last year

Consumer Price Index (CPI)

A measure (index) of changes in the average price of consumer goods and services.

GDP deflator

A price index that refers to all goods and services included in GDP.

Inflation

An increase in the average level of prices, not a change in any specific price

Macro consequences of a falling price level

Are similar to those occurring with a rising price level

core inflation rate

Changes in the CPI, excluding food and energy prices.

Real GDP=

Nominal GDP/GDP deflator×100

When the anticipated rate of inflation is added to the real interest rate, the result is called the

Nominal Interest rate

The interest rate quoted in the market are known as

Nominal interest rates

The challenge for the economy tomorrow is to find the _______ inflation rate

Optimal

On of the biggest costs associated with inflation is:

The redistribution of income and wealth

real GDP

The value of final output produced in a given period, adjusted for changing prices.

nominal GDP

The value of final output produced in a given period, measured in the prices of that period (current prices).

base year

The year used for comparative analysis; the basis for indexing price changes.

The Market Basket

To measure changes in average prices, we must first know what goods and services consumers buy.

The omission of new products such as cell phones causes the CPI to overstate the rate of inflation

True

As average price levels change, economic decision-making becomes more:

Uncertain

Deflation

a decrease in the general level of prices

The three PPIs don't include all producer prices but primarily those

in mining, manufacturing, and agriculture.

If the price of flip-flops increases dramatically, then the CPI

increases negligibly

Food and energy prices often complicate the measurement of inflation because supply and demand of these products

often change, creating temporary changes in prices.

Inflation redistributes

real income

If you hold your wealth in assets that are increasing in value slower than the rate of inflation, you are _____ those who hold assets that are increasing in value at the rate of inflation

relatively worse off than