Chapter 11 Flashcards
Inflation rate
% change in price level from previous period
Producer Price Index (PPI)
Measures the cost of a basket of goods/svs bought by firms rather than consumers
Problems with CPI
Substitution bias: prices don’t change proportionately
Introduction of new goods
Unmeasured quality of change
GDP deflator
Ratio of nominal GDP to real GDP
Reflects the current level of prices relative to the level of prices in the base year
Difference between GDP deflator and CPI
- GDP deflator reflects prices of all G/S produced domestically; CPI reflects prices of all G/S bought by customers
- CPI compares price of a fixed basket of G/S to the price of the basket in base yr; GDP deflator compares price of currently produced G/S to the price of the same G/S in base yr
Formula for turning figures from year T to today
Amount in today’s dollars = amnt in year T dollars x price level today / price level in year T
Indexation
When a dollar amount is automatically corrected for changes in the price level by law or contract
Cost of Living Allowance (COLA)
Automatically raises the wage when CPI rises
Nominal interest rate
Measures change in dollar amounts
tells how fast the # dollars in your bank account rises over time
Real interest rate
Interest rate corrected for inflation
RIR = nominal interest rate - inflation rate
tells how fast the purchasing power of your bank acct rises over time
Level of nominal vs. real interest rate
Nominal almost always exceeds real bc of rising consumer prices
Consumer price index
Measure of the overall cost of goods/svs bought by typical consumer; Used to monitor changes in the cost of living over time
Monitored by BLS
When rises: family has to spend more to enjoy same standard of living
