macro chapter 4

nominal value

the economic statistic actually announced at that time; not adjusted for price changes (inflation or deflation)

real value

an economic statistic after it has been adjusted for price changes (inflation or deflation)

real interest rate formula

real interest rate = nominal interest rate - inflation rate

price index

measure of relative prices

price index = price in period of interest/price in base period

real gdp formula

nominal gdp/price index

inflation

a general and ongoing rise in the level of prices in an entire economy

deflation

severe negative inflation

hyperinflation

an outburst of high inflation

typically defined as price increase of more than 50% monthly

basket of goods and services

a hypothetical group of different items, with specified quantities of each one meant to represent a “typical” set of consumer purchases

consumer price index (CPI)

a measure of inflation that U.S government statisticians calculate based on the price level of a fixed basket of goods and services that represents the average consumer’s purchases

unintended redistribution of purchasing power

people get hurt by inflation when they are holding cash, financial asset investments where the nominal return does not keep up with inflation, wages lag behind, retiree receiving a private company defined pension

blurred price signals

when level and changes of prices become uncertain, businesses and individuals find it harder to react to economic signals

problems of long term planning

planning for retirement in unknown future dollar levels, more time spent by businesses finding ways of profiting from inflation vs time spent on productivity, innovation, or quality of service