Chapter 16 - Inflation & the price level

Deflation

________: situation in which the prices of most goods and services are falling over time so that inflation is negative.

Hyperinflation

________: situation in which the inflation rate is extremely high.

Inflation

________- protected bonds: bonds that pay a nominal interest rate each year equal to a fixed real rate plus the actual rate of inflation during that year.

Consumer price index (CPI)

for any period, a measure of the cost in that period of a standard basket of goods and services relative to the cost of the same basket of goods and services in a fixed year, called the base year

Price index

measure of the average price of a given quality of goods or services relative to the price of the same goods or services in a base year

Rate of inflation

annual percentage rate of change in the price level, as measured, for example, by the CPI

Deflation

situation in which the prices of most goods and services are falling over time so that inflation is negative

Core rate of inflation

rate of increase of all prices except energy and food

Nominal quantity

quantity that is measured in terms of its current dollar value

Deflating (a nominal quantity)

process of dividing a nominal quantity by a price index (such as the CPI) to express the quantity in real terms

Real wage

wage paid to workers measured in terms of purchasing power; the real wage for any given period is calculated by dividing the nominal (dollar) wage by the CPI for that period

Indexing

practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index

Price level

measure of the overall level of prices at a particular point in time as measured by a price index such as the CPI

Relative price

price of a specific good or service in comparison to the prices of other goods and services

Hyperinflation

situation in which the inflation rate is extremely high

Real interest rate

annual percentage increase in the in purchasing power of a financial asset; the real interest rate on any asset equals the nominal interest rate on that asset minus the inflation rate

Nominal interest rate (or market interest rate)

annual percentage increase in the nominal value of a financial asset

Inflation-protected bonds

bonds that pay a nominal interest rate each year equal to a fixed real rate plus the actual rate of inflation during that year

Fisher effect

tendency for nominal interest rates to be high when inflation is high and low when inflation is low

Consumer price index (CPI)

For any period, a measure of the cost in that period of a standard basket of goods and services relative to the cost of the same basket of goods and services in a fixed year, called the base year

Price index

Measure of the average price of a given quality of goods or services relative to the price of the same goods or services in a base year

Rate of inflation

Annual percentage rate of change in the price level, as measured, for example, by the CPI

Deflation

Situation in which the prices of most goods and services are falling over time so that inflation is negative

Core rate of inflation

Rate of increase of all prices except energy and food

Nominal quantity

Quantity that is measured in terms of its current dollar value

Real quantity

Quantity that is measured in physical terms for example, in terms of quantities of goods and services

Deflating (a nominal quantity)

Process of dividing a nominal quantity by a price index (such as the CPI) to express the quantity in real terms

Real wage

Wage paid to workers measured in terms of purchasing power; the real wage for
any given period is calculated by dividing the nominal (dollar) wage by the CPI for that period

Indexing

Practice of increasing a nominal quantity each period by an amount equal to the
percentage increase in a specified price index

Price level

Measure of the overall level of prices at a particular point in time as measured by
a price index such as the CPI

Relative price

Price of a specific good or service in comparison to the prices of other goods
and services

Hyperinflation

Situation in which the inflation rate is extremely high

Real interest rate

Annual percentage increase in the in purchasing power of a financial asset; the real interest rate on any asset equals the nominal interest rate on that asset minus the inflation rate

Nominal interest rate (or market interest rate)

Annual percentage increase in the nominal value of a financial asset

Inflation-protected bonds

Bonds that pay a nominal interest rate each year equal to a fixed real rate plus the actual rate of inflation during that year

Fisher effect

Tendency for nominal interest rates to be high when inflation is high and low when inflation is low