Inflation and Price Index Lecture Notes

Comprehensive vocabulary flashcards covering the definitions, causes, measurements, and consequences of inflation based on the lecture transcript.

Inflation

The sustained increase in the general price level or average price level of goods and services in a country over a period, usually a year, leading to lower purchasing power.

Deflation

The sustained decrease in the general price level or average price level of goods and services in a country over a period, usually a year, leading to higher purchasing power.

Disinflation

A decrease in the rate of inflation, where the price level is still rising but at a slower pace than before.

Hyperinflation

Extortionately high and uncontrollable rates of inflation that cause serious macroeconomic problems, also known as runaway inflation.

Zimbabwe's Hyperinflation

A period between 2003 and 2009 where gross economic mismanagement led to an inflation rate of $231$ million per cent in July 2008 and the printing of $100,000,000,000,000$ Zimbabwean dollar banknotes.

Index Numbers

Figures used to make comparisons over time, beginning in a base year assigned a value of $100$.

Base Year

The specific year used as a benchmark for an index, assigned an index number of $100$. For example, if $2009$ is the base year, its CPI is $100$.

Consumer Price Index (CPI)

A measure of the cost of living or the cost of goods and services purchased by the typical household in an economy, using a representative basket of items.

Weighted Index

An index where different goods and services are assigned 'weights' based on their proportion of household expenditure; items with larger weights have a bigger impact on the overall CPI.

Inflation Rate Formula

The percentage change in the CPI over a period of time, calculated as $\text{Inflation Rate} = \frac{CPI_2 - CPI_1}{CPI_1} \times 100$.

Demand-Pull Inflation

Inflation caused by increases in aggregate demand (AD), often occurring when the economy is near full employment, shown as a rightward shift in the AD curve.

Cost-Push Inflation

Inflation caused by increases in costs of production or supply-side shocks, resulting in a leftward shift of the Short-Run Aggregate Supply (SRAS) curve.

Stagflation

A macroeconomic condition characterized by the presence of both inflation and high unemployment (or falling real GDP), caused by a decrease in SRAS.

Inflationary Spiral

A self-perpetuating process where an initial increase in AD leads to higher prices, which causes workers to negotiate for higher wages, further increasing costs and potentially triggering more AD increases.

Monetarist View of Inflation

The theory by Milton Friedman that inflation is always and everywhere a monetary phenomenon, caused by excessive increases in the money supply by the government.

Nominal Income

The amount of money earned (e.g., $60$ dollars) not adjusted for changes in the general price level.

Real Income

Also known as purchasing power, it refers to what money can actually buy and is calculated as \text{% change in real income} = \text{% change in nominal income} - \text{% change in price level}.

Real Interest Rate

The interest rate after adjusting for inflation, calculated using the formula: $\text{Real interest rate} = \text{nominal interest} - \text{inflation}$.