Lesson 13.2: Inflation
What is the difference between hyperinflation and disinflation?
Hyperinflation is when the interest rate goes really high. Disinflation is when the interest rate drops.
If inflation turns out to be different from what is expected, who benefits the most?
the person who has agree to pay a price that anticipated lower inflation
Other things constant, the higher the expected inflation rate, the higher the nominal rate of interest that lenders require.
true
Since the end of World War 2, the consumer price index has increased on a yearly basis (on average).
true
The price level was lower in 1940 than in 1920.
true
There has been a ten-fold increase in the consumer price index since 1946.
true
To generate sustained and continuous cost-push inflation, the aggregate supply curve would have to keep shifting to the left along a given aggregate demand curve.
true
If the inflation rate is 7.7% and the nominal interest rate is 9%, what is real interest rate?
1.3%
How do we measure inflation?
Consumer Price Index (CPI): a measure (index) of changes in the average price of consumer goods & services. Economists created a "market basket" of goods for the typical urban family of four.
Deflation
a decline in the general level of prices. Bad as well, disinflation occurred during the Great Depression
Inflation
an overall increase in the price level of goods & services. A general increase in the price level, very bad!!!
What does the consumer price index measure?
cost of a "market basket" of consumer goods and services over time
Inflation Hurts
creditors savers, & people on fixed consumer
Inflation Helps
debtors paying back with money of a lesser value
Unexpected inflation may result in which of the following for a given firm?
decreases in the real cost of union laber
An increase in aggregate demand causes what type of inflation?
demand-pull inflation
Inflation increases confidence in the value of the dollar over the long term.
false
It is quite easy to predict how inflation will behave.
false
Stagflation occurs when price decreases and real GDP increases.
false
The USA experienced hyperinflation during the Great Depression
false
There is only one cause of inflation.
false
Demand Pull Inflation
inflation caused by increase in demand, "too many dollars chasing too few goods"
Cost-push Inflation
inflation that results from an increase in costs i.e. oil/gas, wages, regulation, & taxes
What does the annual inflation rate measure?
it measures the percentage increase in the price level from one year to the next.
Which of the following measures interest in terms of current dollars?
the nominal interest rate