Chapter 8 Vocabulary

Question 1

the measure of the price level based on the consumption patterns of a typical consumer

Answer 1

consumer price index (CPI)

Question 2

a measure of the CPI in which the typical consumers basket of goods and services is updated monthly

Answer 2

chained cpi

Question 3

the growth in overall price in the economy

Answer 3

inflation

Question 4

occurs when the overall prices fall
- this is negative inflation -

Answer 4

deflation

Question 5

summarizes the long-run relationship between price level and the quantity of money
- M x V = P x Y -

Answer 5

equation of exchange

Question 6

the costs of changing prices

Answer 6

menu costs

Question 7

occurs when people interpret nominal changes in wages or prices as real changes

Answer 7

money illusion

Question 8

his or her wage expressed in current dollars
- like $60 per hour, of $120,000 per year -

Answer 8

nominal wage

Question 9

the nominal wage adjusted for changes in the price level
- inflation or cost of living -

Answer 9

real wage

Question 10

the product that the firm created

Answer 10

output

Question 11

the resources that are wasted when people change there behavior to avoid holding money

Answer 11

shoe-leather costs

Question 12

the number of times a unit of money exchanges hands in a given year

Answer 12

velocity of money

Question 13

• substitution bias
• new goods, services, and locations
• changes in quality

Answer 13

problems with the measure of cpi

Question 14

formula for calculating cpi

Answer 14

CPI = (cost of basket in current prices / base year cost of basket) x 100

Question 15

formula for calculating real value

Answer 15

real value = (nominal value / price index) x 100

Question 16

formula for calculating price index

Answer 16

price index = (nominal value / real value) x 100