macro module 14-15

explain two reasons why some economist believe the CPI overstates the inflation rate

1. CPI measures cost of buying a given market basket. yet consumers typically alter the mix of goods and services they buy 2. innovation

what is the most widely used measure of inflation in the united states

consumer price index

what is the formula for calculating price index

cost of market basket in a given year / cost of market basket in base year

a process that brings the inflation rate down is called

disinflation

define GDP deflator

for a given year is 100 times the ratio of nominal GDP to real GDP in that year

unexpected inflation benefits borrowers and does what to lenders

hurts

what is the formula for calculating the inflation rate when using a price index

inflating rate = price index in year 2 - price index in year 1 / price index in year 1

inflation doesn't reduce purchasing power if

it causes an increase in nominal wages equivalent to the rate of inflation

when inflation rises quickly

lenders will be hurt an borrowers benefit

the purpose of indexing social security payments to the CPI is to

maintain the purchasing power of retirees

the threat of future inflation

makes people reluctant to loan money for long periods

what does indexed mean in regards to CPI

many payments are tied or indexed to the CPI the amount paid rises or falls when the CPI rises or falls

define price index

measures the cost of purchasing a given market basket in a given year

what is the consumer price index

measures the cost of the market basket of a typical urban american family

hyperinflation forcing pedro to change the price stickers on the books in his bookstore very frequently to keep up with the aggregate price level

menu costs

what likely happens when inflation occurs

people tend to make more transactions

what statistic is used to measure changes in the prices that firms pay for goods and services

producer price index

if money income remains the same while the average price level doubles then what happens

real income will fall

unanticipated inflation

reduces the value of debt owed by the borrowers

define nominal interest rate

the rate actually paid for a loan

the costs arising from the way inflation makes money a less reliable unit of measurements are known as

unit of account costs

what is commonly used to measure the cost of living

consumer price index

what is a market basket

a hypothetical set of consumer purchases of goods and services

define aggregate price level

a measure of the overall level of prices in the economy

the consumer price index reflects the

changes in the price of goods and services typically purchased by consumers

deflation is a

decrease in the average level of prices

hyperinflation forcing somebody to visit their bank frequently to keep their cash holding to a minimum

shoe leather cost

high rates of inflation often result in people spending inordinate amounts of time trying to make transactions and finding ways to keep the real value of their money from decreasing this is an example of

shoe leather costs

the inflation or deflation rate is

the change in a price index divided by the initial value of the index

unit of account costs refer to

the loss of reliability of money as a relative unit of measurement

formula for real interest rate

the nominal interest rate minus the rate of inflation

the aggregate price level is

the overall level of prices in the economy

inflation can be measured by

the percentage change in the CPI