chapter 4

Question 1

what is inflation?

Answer 1

an increase in the average of prices
- inflation is measured by changes in a price index
→ all prices indexes are set up so that the index equals a value of 100 in the base year
inflation rate → percentage change in a price index from one year to the next
e inflation rate (%) = (P_2 - P_1)/ P_1 *100

Question 2

what is the consumer price index (CPI)?

Answer 2

• measures the average price level of a (fixed) basket of consumption goods and services
• prices for the goods and services included in the basket are measured on a monthly basis
• the conposition of the basket is updated less frequently

Question 3

what are the difference between CPI and the GDP deflator?

Answer 3

• prices of imported goods (enter in CPI, but not in GDP deflator)
• public sector wages (directly affect GDP deflator, but not CPI)

Question 4

what is money?

Answer 4

• generally accepted as a means of payment
  → replaces barter trade → allows to overcome the need for a “double coincidence of wants”
• the nature of money has changes over time
  → commodity money → an object made of something that had a market value, such as a gold coin
  → representative money → bank notes that could be swapped against a certain amount of gold and silver
  → fiat money → bills and coins

Question 5

What are the functions of money?

Answer 5

• medium of exchange → an object that is generally accepted in exchange for goods and services
• unit of account → an agreed measure for stating the prices of goods and services
• store of value → can be held for a time and later exchanges for goods and services

Question 6

what does money consist of?

Answer 6

• currency (C) → notes and coins held by individuals and businesses
• deposits (D) → at banks and other depository institutions - it is also included in the concept of money because the owners can use deposits to make payments

M = C + D