Inflation

What is the CPI?

--Consumer price index (CPI): Measures the average price for a basket of goods and services bought by a typical American consumer. The index covers some 80,000 goods and is weighted so that an increase in the price of a major item such as housing counts for more than an increase in the price of a minor item like kitty litter. --As a result of these challenges, some economists suggest that the CPI may actually overstate inflation by a little bit every year (0.9% is one estimate). --The CPI is often used to calculate "real prices."

What is disinflation?

A disinflation is a reduction in the inflation rate.

What is a real price

A real price is a price that has been corrected for inflation. Real prices are used to compare the prices of goods over time.

What is deflation?

Deflation is a decrease in the average level of prices (a negative inflation rate).

What causes inflation (in the long-run)?

If Y R is fixed by the real factors of production and v is stable, then it follows immediately that the only thing that can cause increases in P are increases in M, the supply of money. In other words, inflation is caused by an increase in the supply of money.

What does it mean to say that "money is neutral"?

In the long run, money is neutral.???

What is inflation?

Inflation is an increase in the average level of prices.

Inflation is like a drug

Just Say No! Inflation has been likened to a drug addiction. At first the highs (a booming economy) are good. But soon bigger and bigger doses are needed to generate the same high as before (unexpected inflation becomes expected inflation). Eventually, all that is left is the fear of withdrawal (disinflation).

Equation

M × v = P × Y R M is the money you are paid, v is the number of times in a year that you spend M (we call v the "velocity of money," hence the v), P is prices, Y R is a measure of the real goods and services that you buy.

What is monetizing the debt?

Monetizing the debt is when the government pays off its debts by printing money.

What is the money illusion?

Money illusion is when people mistake changes in nominal prices for changes in real prices.

What is the nominal rate of return?

Nominal rate of return is the rate of return that does not account for inflation.

Equation of real interest rate

Real interest rate = Nominal rate −Inflation rate

What is the real rate of return?

Real rate of return is the nominal rate of return minus the inflation rate.

What is the Fisher effect?

The Fisher effect is the tendency of nominal interest rates to rise with expected inflation rates.

Why is inflation bad from an economic perspective? (why do we care about inflation?)

The inflation parable tells us that an unexpected increase in the money supply can boost the economy in the short run, but as firms and workers come to expect and adjust to the new influx of money, output will not grow any faster than normal. The inflation parable serves us well for now, but the short-run relationship between unexpected inflation and output is a key idea in economics --inflation is a type of tax.

What is the inflation rate?

The inflation rate is the percentage change in the average level of prices (as measured by a price index) over a period of time. Inflation rate = [(P2 −P 1) / P1 ] × 100

What is the Quantity Theory of Money?

The quantity theory of money does two things: --It sets out the general relationship between money, velocity, real output, and prices. --It helps to explain the critical role of the money supply in determining the inflation rate.

What is velocity?

v, velocity of money, is the average number of times a dollar is spent on final goods and services in a year.