Chapter 7

Question 1

an increase in the average level of prices of goods and services

Answer 1

inflation

Question 2

a decrease in the average level of prices of goods and services

Answer 2

deflation

Question 3

the price of one good in comparison with the price of other goods

Answer 3

Relative Prices

Question 4

the amount of money income received in a given time period, measured in current dollars

Answer 4

Nominal Income

Question 5

income in constant dollars; nominal income adjusted for inflation

Answer 5

Real Income

Question 6

What are the two basic lessons of inflation

Answer 6

• Not all prices rise at the same rate during an inflation

- Not everyone suffers equally from inflation

Question 7

What are the redistributive mechanisms of inflation?

Answer 7

• Price Effects
• Income Effects
• Wealth Effects

Question 8

people who buy products that are increasing in price the fastest end off worse

Answer 8

price effects

Question 9

people whose nominal incomes rise more slowly than the rate of inflation end up worse off

Answer 9

income effects

Question 10

people who own assets that are declining in real value end up worse off

Answer 10

wealth effects

Question 11

the use of nominal dollars rather than real dollars to gauge changes in one’s income or wealth

Answer 11

Money Illusion

Question 12

Inflation rate in excess of 200% lasting at least one year

Answer 12

Hyperinflation

Question 13

the movement of taxpayers into higher tax brackets as nominal incomes grow

Answer 13

Bracket Creep

Question 14

what two purposes does the measurement of inflation serve?

Answer 14

• To gauge the average rate of inflation

- To identify its principle victims

Question 15

A measure of changes in the average price of consumer goods and services

Answer 15

Consumer Price Index (CPI)

Question 16

the annual percentage rate of increase in the average price level

Answer 16

Inflation Rate

Question 17

the year used for comparative analysis; the basis for indexing and computing; price changes

Answer 17

Base year

Question 18

the percentage of total expenditure spent on a specific product; used to compute inflation indexes

Answer 18

Item Weight

Question 19

changes in the CPI, excluding food and energy prices

Answer 19

Core Inflation Rate

Question 20

What are the three Producer Price Indexes

Answer 20

• Crude materials
• Intermediate goods
• Finished goods

Question 21

a price index that refers to all goods and services included in GDP

Answer 21

GDP deflator

Question 22

the value of final output produced in a given period, measured in the prices of that period (current prices)

Answer 22

Nominal GDP

Question 23

the value of final output produced in a given period, adjusted for changing prices

Answer 23

Real GDP

Question 24

how is real GDP calculated?

Answer 24

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

Question 25

the absence of significant changes in the average price level; officially defined as a rate of inflation of less than 3%

Answer 25

Price Stability

Question 26

Excessive pressure on this can often cause inflation

Answer 26

the demand side

Question 27

pressure on prices can also originate where?

Answer 27

the supply side

Question 28

automatic adjustments of nominal income to the rate of inflation

Answer 28

Cost of Living Adjustment (COLA)

Question 29

the nominal interest rate minus the anticipated interest rate

Answer 29

Real Interest Rate

Question 30

a mortgage that adjusts the nominal interest rate to changing rates of inflation

Answer 30

Adjustable rate mortgage

Question 31

the rate of output at which inflationary pressures intensify; the point on the supply curve where slope increases sharply

Answer 31

Inflationary flashpoint