Chapter 13: Inflation

Deflation

A decrease in the general (average) price level of goods and services in the economy.

Demand-pull inflation

A rise in the general price level resulting from an excess of total spending (demand).

Inflation

An increase in the general (average) price level of goods and services in the economy.

Cost-push inflation

An increase in the general price level resulting from an increase in the cost of production.

Consumer price index (CPI)

An index that measures changes in the average prices of consumer goods and services.

Real income

The actual number of dollars received (nominal income) adjusted for changes in the CPI.

Nominal income

The actual number of dollars received over a period of time.

Real interest rate

The nominal rate of interest minus the inflation rate.

Wealth

The value of the stock of assets owned at some point in time.

Calculating CPI

Year A(CPI) - Year B(CPI) / Year B(CPI) * 100 = inflation rate

Hyperinflation

growing out of control. Inflation rates may be as high as 100 or even 500 percent.

Creeping Inflation

inflation that remains low (1 to 3 percent) for a long time.

Price Index

measurement that shows how the average price of a standard group of goods changes over time.

CPI is determined by

measuring the price of a standard group of a standard meant to represent the typical "market basket" of an urban consumer.

Chronic Inflation

occurs when the inflation rate rises steadily from month to month over an extended period.

Price Level

relative cost of goods and services in the entire economy at a given point in time.

Quantity Theory

states that too much money in the economy leads to inflation.

PUrchasing Power

the ability to purchase goods and services, is decreased by rising prices