Price Levels and Inflation/Deflation

Question 1

What are the consequences of inflation?

Answer 1

1. Lower current wealth and lower future real income
2. Higher interest rates
3. Uncertainty of economic measures

Question 2

Define “price indexes (or indices)”.

Answer 2

Factor that converts prices of each period to what those prices would be in terms of prices of a specific prior (or subsequent) reference period

Question 3

What causes supply-induced (or cost-push or supply-push) inflation?

Answer 3

Results from increases in the cost of inputs to the production process which are passed on to the final buyer in the form of higher prices.

Question 4

Identify three common price indices.

Answer 4

1. Consumer Price Index (CPI)
2. Wholesale Price Index (WPI)
3. Gross Domestic Product (GDP) Deflator

Question 5

What causes demand-induced (or demand-pull) inflation?

Answer 5

Results when aggregate spending for goods and services exceeds the productive capacity of the economy at full employment.

Question 6

Define “inflation” and “deflation”.

Answer 6

1. Inflation = the rate of increase in the price level
2. Deflation = the rate of decrease in the price level
   In the U.S., most commonly measured by the CPI-U.