Inflation

Question 1

What are the limitations to the consumer price index?

Answer 1

1. Socio-economic class bias
2. Weight and content bias
3. Quality and novelty bias
4. Regional bias
5. Volatility bias
6. Substitution bias

Question 2

When is inflation good?

Answer 2

low, constant, predictable

Question 3

inflation

Answer 3

increase in the average price level of goods and services in a nation over time

Question 4

deflation

Answer 4

decrease in the average price level of goods and services over time

Question 5

What does inflation cause the value of money to do?

Answer 5

• decrease
• makes money less valuable (reduces its purchasing power)

Question 6

disinflation

Answer 6

decrease in rate of inflation

Question 7

consumer price index (CPI)

Answer 7

• measures the prices of consumer goods and services
• measures changes in the price level of the products that a typical household may buy in a particular time period

Question 8

inflation index equation

Answer 8

current basket price / base year basket price *100

Question 9

What is the index of the base year?

Answer 9

100

Question 10

What is the effect of an increase in basket price on the value of money?

Answer 10

value of money decreases

Question 11

equation to adjust for inflation (deflator)

Answer 11

nominal * base year index/current year index

Question 12

Who does inflation help?

Answer 12

borrowers

Question 13

Who does inflation hurt?

Answer 13

lenders

people on fixed income (pensions, transfer payments - benefits)

Question 14

nominal interest rate equation

Answer 14

real interest rate + anticipated inflation rate

Question 15

What are the different types of inflation?

Answer 15

• Demand-pull
• Cost-push

Question 16

demand-pull inflation

Answer 16

• too many consumers chasing too few goods
• average price of goods in nation rises

Question 17

cost-push inflation

Answer 17

costs of production faced by a nation’s producers rise (due to higher energy costs, wages, etc.)

average price level of nation rises

Question 18

What is another name for cost-push inflation?

Answer 18

stagflation because economy is experiencing zero or negative economic growth

Question 19

classical inflation

Answer 19

• print too much money for too few goods
• prices increase