Term
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Definition
| The general rise in the price level |
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Term
| During inflation, the dollar is worth _____ |
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Definition
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Term
| Inflation reduces the ______ _______ of money |
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Definition
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Term
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Definition
| Consumer Price Index (CPI) |
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Term
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Definition
| Measures the typical consumer's cost of living |
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Term
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Definition
| The Bureau of Labor Statistics |
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Term
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Definition
| Welfare, Social Security, Union Contracts |
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Term
| 3 steps to calculating CPI |
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Definition
1. Fix the "basket"
2. Find the prices
3. Compute the basket's cost |
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Term
| How do you "Fix the basket" when calculating CPI? |
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Definition
| Determine what is in the typical consumer's budget (health care) |
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Term
| How do you "Find the Prices" when calculating CPI? |
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Definition
| an employee goes into different stores and finds the costs of these goods |
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Term
| How do you "Compute the basket's cost"? |
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Definition
compute the total cost of the basket
ex: how much does it cost the typical american to live each year |
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Term
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Definition
| 100 x cost of basket in current yr / cost of basket in base yr |
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Term
| Is CPI an index or percentage? |
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Definition
| an index typically over 100 |
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Term
| Equation to compute the inflation rate |
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Definition
| inflation rate = 100 x [( CPI this yr - CPI last yr)/ CPI last yr] |
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Term
| Equation to calculate price in today's dollar |
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Definition
| price in today's dollars = Price then x (CPI today/CPI then) |
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Term
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Definition
1. introduction of new goods
- only use retail outlets
- use a fixed basket of goods
2. Unmeasured quality change |
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Term
| Does the CPI overstate or understate the cost of living? |
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Definition
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Term
| Who deals with the problem of overstating inflation? |
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Definition
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Term
| Who is hurt by unexpected inflation? (3) |
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Definition
1. fixed income receivers
2. savers
3. creditors |
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Term
| Who is unaffected by unexpected inflation? |
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Definition
| Flexible income receivers - COLAs |
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Term
| Who is helped by unexpected inflation? |
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Definition
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Term
| How to calculate real interest rate |
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Definition
| real interest rate = nominal interest rate - inflation rate |
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Term
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Definition
1. shoe leather costs
2. money illusion
3. menu costs
4. uncertainty
5. price confusion
6. tax distortions |
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Term
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Definition
| - extraordinarily rapid inflation |
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Term
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Definition
| - an increase in the money supply |
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Term
| As a government increases the amount of money in circulation, the value of money _____ |
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Definition
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Term
| 2 reasons why inflation exists |
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Definition
1. large government debts
2. stimulation the economy |
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