Changes in Price Level - Macroecon Chapter 26

Inflation

Inflation

Increase in the general level of prices

Disinflation

A reduction in the rate of inflation (Ex: 2020 inflation was 8%, 2021 is 7%)

Consumer Price Index (CPI)

Price index used to measure the inflation rate

Market basket

Collection of consumer G/S purchased by a typical urban consumer

Nominal Income

Income earned in current dollars

Real income

Income earned after inflation has been taken into account

Demand-Pull Inflation

Occurs when an increase in demand pulls up prices

Cost-Push Inflation

Occurs when a firms’ per unit costs of production increase, causing the supply to decrease

Deflation

Decrease in the general level of prices

Hyperinflation

Extreme inflation

New Goods Bias

When more expensive goods entering the market basket cause prices to go up

Changes in the Quality of Goods Bias

Improvement in the quality of goods increasing prices

Substitution Bias

Consumers will substitute expensive goods with cheaper ones