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13 Cards in this Set

  • Front
  • Back
what is a price level?
a measure of the overall level of prices in the economy
what is CPI?
a price index that measures a basket of goods in the current year in relation to the base year
what are two ways that the CPI may overstate inflation?
1.) quality adjustment bias
2.) substitution bias
what is a quality adjustment bias?
- the inability of analysts to adjust the data for changes in product quality
- an increase in product quality could justify an increase in prices
what is a substitution bias?
the data does not include the possibility that if the price of one good goes up, people will buy more of another rather than keep on paying more for the same good
What are the 5 costs of inflation?
1.) Menu costs
2.) Relative price distortions
3.) Distortions of the tax system
4.) Shoe-leather costs
5.) Unexpected wealth redistribution
What are menu costs?
The cost to update changes in price
What are relative price distortions?
Different firms adjust their menus at different times
What are distortions of the tax system?
some taxes are not fully adjusted for ongoing inflation, so you end up paying more or less tax than you really should
what are shoe-leather costs?
the use of resources to combat inflation.
ex: making more frequent trips to the bank rather than holding large sums of money
What is unexpected wealth redistribution?
if true inflation is different than expected inflation:
1.) higher than expected: creditors lose and borrowers gain
2.) lower than expected: creditors gain and borrowers lose
what is the Fisher effect?
the tendency for the nominal interest rate to rise when the inflation rate increases to combat the effects of inflation
how do you calculate a price index?
divide the current year prices by the base year prices of the same goods