Inflation Flashcards
(23 cards)
What is inflation?
The change in the price of a basket of goods and services typically purchased by specific groups of households.
How is inflation measured?
By consumer price index (CPI) in terms of the annual growth rate and in index, with a breakdown for food, energy, and total excluding food and energy.
What does inflation indicate about currency value?
It reduces the value of the currency over time.
What is the acronym for the index used to measure consumer price inflation in the euro area?
HICP (Harmonised Index of Consumer Prices).
What does ‘harmonised’ signify in HICP?
All countries in the European Union follow the same methodology.
What happens to purchasing power when nominal income does not increase as much as prices?
Purchasing power or real income falls.
What does real income proxy for?
The standard of living.
True or False: High inflation is desirable for an economy.
False.
What is deflation?
Falling prices.
What is the impact of deflation on consumer behavior?
Consumers delay making purchases, anticipating lower prices in the future.
What do most economists believe about low and stable inflation?
It is good for an economy.
What is inflation targeting?
A policy objective of maintaining low and stable inflation.
What creates inflation?
When the money supply grows too big relative to the size of an economy.
What is the quantity theory of money?
The relationship between the money supply and the size of the economy.
List the factors that can create inflation.
- Supply shocks
- Cost-push inflation
- Demand shocks
- Expansionary policies
What are the three types of inflation?
- Demand pull inflation
- Cost push inflation
- Built in inflation
What is the target inflation rate in the EU?
2%.
What are some advantages of inflation?
- Increases the price of tangible assets
- Encourages speculation
- Promotes spending over saving
What are the disadvantages of inflation?
- Erodes real value of cash or bonds
- Increases costs for buyers of assets
What assets can investors consider to protect against inflation?
- Gold
- Commodities
- Real estate investment trusts (REITs)
- Inflation-indexed bonds
What is contractionary monetary policy?
A policy aimed at reducing the money supply within an economy by increasing interest rates.
Fill in the blank: The goal of contractionary policy is to reduce the money supply by increasing _______.
[interest rates]
What changes are made in contractionary monetary policy?
Changes in open market operations.
