Macroeconomics: Exam 2 (chapter 12)
"deflate" nominal values to real values
Value in this year's dollars=value in past year's dollars x (CPI this year/ CPI past year)
expected inflation<actual inflation
benefits borrowers lenders ---> borrowers
expected inflation> actual inflation
benefits lenders
Debt monetization means that a government pays off its debt by:
increasing the money supply.
implicit price index
GDP deflator includes all goods and services produced in the economy & is implied by the difference between nominal and real GDP
quantity theory of money
M + v= P + Yr
When the expected rate of inflation is higher than the actual rate of inflation, wealth is:
redistributed from borrowers to lenders.
The quantity theory of money predicts that the main cause of inflation is increases in:
the money supply.
2 types of price indexes:
1)explicit price index ex- consumer price index (cpi) 2)implicit price index ex-GDP deflator which is P=(nominal GDP/real GDP)x100
Which of the following is a problem with deflation?
It raises the real cost of debt repayment.
what is a price index?
a number that measures the average level of prices in a given period relative to the average level of prices during some period of time
inflation
an increase in the average level of prices over time -decline in the value or "purchasing power" of currency -doesn't decrease amt. of purchases an individual can make--- it increases the amt. of dollars needed to purchase certain items
The primary reason we think of inflation as bad even when wages rise with it is that it:
distorts the information delivered by prices
Money illusion is:
mistaking changes in nominal prices for changes in real prices.
expected inflation=actual inflation
no redistribuition
explicit price index
uses explicit data on prices of a set of typical consumer goods and services in different years(CPI)