Macroeconomics: Exam 2 (chapter 12)

"deflate" nominal values to real values

Value in this year's dollars=value in past year's dollars x (CPI this year/ CPI past year)

expected inflation<actual inflation

benefits borrowers lenders ---> borrowers

expected inflation> actual inflation

benefits lenders

Debt monetization means that a government pays off its debt by:

increasing the money supply.

implicit price index

GDP deflator includes all goods and services produced in the economy & is implied by the difference between nominal and real GDP

quantity theory of money

M + v= P + Yr

When the expected rate of inflation is higher than the actual rate of inflation, wealth is:

redistributed from borrowers to lenders.

The quantity theory of money predicts that the main cause of inflation is increases in:

the money supply.

2 types of price indexes:

1)explicit price index ex- consumer price index (cpi) 2)implicit price index ex-GDP deflator which is P=(nominal GDP/real GDP)x100

Which of the following is a problem with deflation?

It raises the real cost of debt repayment.

what is a price index?

a number that measures the average level of prices in a given period relative to the average level of prices during some period of time

inflation

an increase in the average level of prices over time -decline in the value or "purchasing power" of currency -doesn't decrease amt. of purchases an individual can make--- it increases the amt. of dollars needed to purchase certain items

The primary reason we think of inflation as bad even when wages rise with it is that it:

distorts the information delivered by prices

Money illusion is:

mistaking changes in nominal prices for changes in real prices.

expected inflation=actual inflation

no redistribuition

explicit price index

uses explicit data on prices of a set of typical consumer goods and services in different years(CPI)