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
