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Inflation
part one for exam 2
18
Business
Undergraduate 1
11/01/2010

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Term
Inflation
Definition
is the persistent increase in overall average of prices
Term

Core inflation

 

Definition
overall change in prices excluding food and energy
Term
deflation
Definition
is the opposite of inflation, overall consumer prices fall
Term
Disinflation
Definition
means declining rate of inflation through time
Term
Hyperinflation
Definition
means out of control inflation
Term
Stagflation
Definition
simultaneous occurance of high inflation and high unempliment
Term
price level
Definition
a measure of the average prices of selected goods and services
Term
inflation rate
Definition
the percentage increase in the price level from one year to the next
Term
Causes of inflation
Definition

-demand-pull inflation, caused by excess

-cost- push inflation, caused by persistent increase in prices of strategic resources

-monetary inflation, caused by too much money, excess liquidity

Term
CPI
Definition

a weighted avaerage of prices of a representative sample of goods ans services- known as market basket- typically purchased by American consumers

 

- it is designed to measure the changes in the cost of living for American households

Term
CPI is a fixed-weight index, so it has some shortcomings
Definition

-When prices change over time consumers find cheaper substitutes for expensive products

-data problems(correct prices paid by consumers may not be the same as prices used by BLS when calculating CPI

-CPI shows the overall average movements in prices. So some prices increase faster than overall average & others may change at slower rate

Term
effects of unanticipated inflation
Definition

-distorts the long-term projects and contracts

-diminishes the value of household savings

-frequent re-pricing of goods and services, menu costs

-effects the flow of exports and imports

-prices lose thier economic meaning

-causes misallocation of resources, diversion of resources into speculative activites

-redistribution of wealth

Term
redistribution effects of inflation for the losers
Definition

-creditors

-tax payer

-savers

-exporters

-fixed-income people

-people who fail to anticipate inflation

Term
redistribution effects of inflation for winners
Definition

-debtors

-government, taxes

-people whose income increases faster than the rate of inflation

-those who correctly forecast inflation

Term
remedies for inflation
Definition

-wage and price control

-restraints on the growth of aggregate demand

-restriants on money and credit

Term
real interest rate
Definition
the nomial interest rate adjusted for inflation
Term
indexation
Definition
a technique to adjust money payments by means of a price index to maintain the purchasing power of a monetary amount after inflation
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