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15 Cards in this Set
- Front
- Back
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Inflation
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an increase in the average level of prices of goods and services. it acts like a tasx, takign income or wealth from one group and giving it to another
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deflation
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a decrease in the average level of prices of goods and services
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Effects of inflation
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1. Price effects
2. Income effects 3. Wealth effects |
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Price effects
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Price changes, increases, lead to you not being able to buy as many goods. less money for everything else. Nominal vs real income
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Nominal income
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the amount of money income received in a given time period, measured in current dollars
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Real income
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Income in constant dollars; nominal income adjusted for inflation.
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Income effect
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Some ppl have fixed incomes that dont go up with inflation. If prices are rising, income is rising too. Ppl whose nomian income rise more slowly than the reate of inflation end up worse off.
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Wealth effects
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Inflation may reduce the REAL value of your savings if you earned 5 dollars but prices have rised more. People who own assets that are declining in real value end up worse off.
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Money illusion
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The use of nominal dollars rather than real dollars t gauge changes in ones income or wealth
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Measuring inflation
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Consumer Price Index (CPI)
Market basket |
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CPI
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measure of changes in the average prices of consumer goods and services. First identify a market basket!!! Then calculate price year to year. expressed in terms of what the market cost in a base year. Calculate= (this year/ base year)X100
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Calculate inflation rate
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(year 2 price index- year 1 price index)/ (year 1 price index) x 100
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The Core rate
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excludes food and energy prices because chould change immensely based on weather etc.
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Price stability
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Thea absense of significant changes in the average price level; officially defined as a rate of inflation of less than 3 %
Full employment and balanced growth act of 1978 said 3% |
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Quality changes
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CPI does not take into account quality changes. and new prooducts!
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