Macro- Chapter 7: Inflation
CPI formula
cost of basket in current year/cost of basket in base year x 100
When does supply shock occur?
Supply shocks occur when sudden and sharp increases in the price of a key input, such as oil, lead to an increase in firms' per-unit production costs.
real income
The actual number of dollars received (nominal income) adjusted for changes in the CPI.
Adjustable rate mortgages
home loan that adjusts the nominal interest rate to changes in an index rate
demand-pull inflation
increases in the price level (inflation) resulting from an excess of demand over output at the existing price level, caused by an increase in aggregate demand
What happens during hyperinflation?
money loses purchasing power so quickly that people try to convert it into goods or real assets as soon as they get it. The effort and time that these transactions require constitute one of the major costs of hyperinflation.
real income formula
nominal income/CPI (decimal or CPI/100)
How do you calculate real interest rate?
real interest rate = nominal interest rate - inflation rate
wealth
the value of the stock of assets owned at some point in time (real estate, stocks, bonds, bank accounts)
Which of the following are consequences of hyperinflation
-People spend significant time and effort buying goods and services to avoid losing purchasing power. -Investors make speculative rather than productive investments.
Hyperinflation
A very rapid rise in the price level; an extremely high rate of inflation.
Annual rate of inflation
CPI given year - CPI previous year / CPI previous year x 100
What is deflation and what harm does it cause?
Deflation is a general decline in prices. The harm that it causes includes possible vicious cycle in which falling demand lowers prices, causing consumers and businesses to postpone purchases, reducing demand further. Also, deflation raises the real interest rate and further reduces investment.
Which of the following economic changes are consistent with cost-push inflation?
Falling economic output An increase in the price level A sudden, sharp increase in the costs of raw materials or energy inputs
nominal income
The number of dollars received by an individual or group for its resources during some period of time. (wages, salaries, rent, dividends.
base year
The year chosen as a point of reference or basis of comparison for prices in other years; a benchmark year.
What is inflation?
a general increase in prices and fall in the purchasing value of money.
Consumer Price Index (CPI)
a measure of the overall cost of the goods and services bought by a typical consumer (no gov or business)