Chapter 7: The Price Level and Inflation

will not

if inflation is correctly anticipated, and if both parties take it into account, then inflation (will/will not) redistribute purchasing power

relative

index numbers are meaningful only in a ________ sense

purchasing power; average real income

inflation can redistribute ______ from one group to another, but it does not directly decrease the ___________ in the economy

purchasing power

inflation can shift ______ away from those who are awaiting future payments specified in dollars, and toward those who are obligated to make such payments

loss; rise

the ______ in buyer's purchasing power is matched by the ______ in seller's purchasing power when a price rises

is

the change in the market basket's cost (is/is not) the same as the change in price level

CPI market basket

the collection of goods and services that the typical consumer buys

approximation rule

the percentage change in a real value is approximately equal to the percentage change in the associated nominal value minus the percentage change in the price level

inflation rate

the percentage change in the price level from one period to the next; tells us how fast the price level is changing; tells us the percentage change in the price level from one period to the next

nominal interest rate

the percentage increase in the lender's dollars each year from making the loan

real interest rate

the percentage increase in the lender's purchasing power each year from making the loan

real GDP

the production of goods and services valued at constant prices

nominal GDP

the production of goods and services valued at current prices

increases; toward; away

when a payment is indexed and the price index overstates inflation, the real payment _____ over time; purchasing power is automatically shifted ______ those who are indexed and _____ from the rest of society

number of dollars; purchasing power

when comparing dollar values over time, we care not about the __________, but about their _________

obliged to make future payments; those waiting to be paid

when inflationary expectations are inaccurate, purchasing power is shifted between those _________ and ________

opportunity cost

when people must spend time and other resources coping with inflation, they pay an ___________ - they sacrifice the goods and services those resources could have produced instead

negative; deflation

whenever the price level falls, the inflation rate will be ______ or we will experience _______

positive

whenever the price level rises, the inflation rate will be _______

CPI

(cost of market basket in current period/cost of market basket in base period) x 100

real wage formula

(nominal wage in that year/CPI in that year) x 100

calculation for index number

(value of measure in current period/value of measure in base period) x 100

rate of inflation

CPI's growth rate = ________

payers; awaiting payment

an inflation rate lower than expected harms the _______ and benefits those _________

deflation

a decrease in the price level from one period to the next; a negative inflation rate

indexed payment

a payment that is periodically adjusted in proportion with a price index

index

a series of numbers used to track a variable's rise or fall over time

substitution bias; overweighted; underweighted

although the BLS has partially fixed the problem, the CPI still suffers from ________; that is, categories of goods whose prices are rising most rapidly are _______ in the CPI market basket and categories of goods whose prices are rising most slowly are _______

Consumer Price Index

an index of the cost, through time, of a market basket of goods purchased by a typical household

GDP price index

an index of the price level for all final goods and services included in GDP

awaiting payment; payers

an inflation rate higher than expected harm those _______ and benefits the ____

is

rent (is/is not) calculated in the CPI

excludes; included; entirely separate; lower

the CPI _____ new products that tend to drop in price when they first come on the market; when those products are _______, the CPI regards them as ______ from existing goods and services, instead of recognizing that they _____ the cost of obtaining a given service

consumers; businesses; government agencies; other countries

the CPI does not includes goods and services purchased by anyone other than ______ i.e ______, _______, and goods purchased by ________

used; imports; not in

the CPI includes household purchases of ____ goods and of ______ which are normally (in/not in) GDP

as a policy target; to index payments; to translate from nominal to real values

the CPI is used in three ways: 1. ________, 2. __________, and 3. ____________

goods; services

the CPI tracks the price of _______ and _____ ONLY

used goods; imports; CPI

the GDP price index excludes ________ and _____, both of which are included in the _____

consumers; government; businesses; exports

the GDP price index includes the prices of goods bought by _______, ______, ____, and _____

GDP; households

the GDP price index measures the prices of all goods and services that are included in U.S _____, while the CPI measures the prices of all goods and services bought by U.S _______

CPI; quality improvements; overestimates

the _____ fails to fully account for _______ in the goods and services in its market basket and, therefore, _________ how fast the price of the basket is rising

CPI; overstates

the ______ does not recognize that a new discount outlet lowers the prices on many items for the people who begin shopping there; as a result, as discount outlets expand into new area, the CPI _______ the inflation rate for food, electronic appliances, clothing, and other items sold there