AP Review - Inflation and Interest Rates (in particular)

Question 1

People who are hurt by inflation

Answer 1

Lenders, people with fixed incomes, savers

Question 2

People who are helped in inflation

Answer 2

Borrowers, businesses where price of product increases faster than inflation

Question 3

Nominal Wage

Answer 3

Wage based on dollar value and not purchasing power

Question 4

Real wage

Answer 4

Wage adjusted for inflation (inflation = should ask for raise)

Question 5

Nominal GDP

Answer 5

GDP value that is measured in current prices (doesn’t account for inflation)

Question 6

GDP Deflator + Real GDP Equation

Answer 6

(GDP Deflator) = (Nominal GDP) / Real GDP * 100

Question 7

Nominal Interest Rate (IR)

Answer 7

“Current” interest rate (% increase in money that borrower pays)

Question 8

Real Interest Rate (IR)

Answer 8

Interest rate that is adjusted for inflation (% increase in purchasing power that borrower pays)

Question 9

3 main causes of inflation

Answer 9

1. Government prints too much money (less scarce money is, less value it holds [Quantity Theory])
2. Demand-Pull inflation (more demand/consumption = more inflation)
3. Cost-Push inflation (higher production costs = increased prices [supply curve shifts to the left])

Question 10

Recession

Answer 10

6-month period of decline in Real GDP

Question 11

Formula for real interest rates

Answer 11

real interest rates = (nominal interest rate) - (expected inflation)