Chapter 7 Flashcards
an increase in the average level of prices of goods and services
inflation
a decrease in the average level of prices of goods and services
deflation
the price of one good in comparison with the price of other goods
Relative Prices
the amount of money income received in a given time period, measured in current dollars
Nominal Income
income in constant dollars; nominal income adjusted for inflation
Real Income
What are the two basic lessons of inflation
- Not all prices rise at the same rate during an inflation
- Not everyone suffers equally from inflation
What are the redistributive mechanisms of inflation?
- Price Effects
- Income Effects
- Wealth Effects
people who buy products that are increasing in price the fastest end off worse
price effects
people whose nominal incomes rise more slowly than the rate of inflation end up worse off
income effects
people who own assets that are declining in real value end up worse off
wealth effects
the use of nominal dollars rather than real dollars to gauge changes in one’s income or wealth
Money Illusion
Inflation rate in excess of 200% lasting at least one year
Hyperinflation
the movement of taxpayers into higher tax brackets as nominal incomes grow
Bracket Creep
what two purposes does the measurement of inflation serve?
- To gauge the average rate of inflation
- To identify its principle victims
A measure of changes in the average price of consumer goods and services
Consumer Price Index (CPI)