Macroeconomic Measurement: Prices, Inflation, and Money

Comprehensive vocabulary flashcards covering the economic measurement of prices, costs of inflation, characteristics and definitions of money, cryptocurrencies, and monetary aggregates (M1 and M2).

Producer Price Index (PPI)

A price index that tracks the prices of inputs into the production process, helping businesses monitor input costs and signaling future changes in output prices.

Real Value in Base Year Dollars

The inflation-adjusted value calculated using the formula: $\text{Real Value in Base Year Dollars} = \frac{\text{Price Level in Base Year}}{\text{Price Level in Year } t} \times \text{Nominal Value in Year } t$.

Menu Costs

The marginal costs incurred by businesses to adjust their prices during times of inflation.

Shoe-Leather Costs

The costs and effort incurred by individuals and firms trying to avoid holding physical or digital cash during periods of expected inflation.

Inflation-Induced Wealth Redistribution

An unintended cost of unexpected inflation that arbitrarily redistributes wealth away from savers and lenders and toward borrowers.

Hyper-Inflation

Extremely high and unpredictable inflation, commonly defined as prices doubling every few months or exceeding an inflation rate of $50\%$ per month.

Money Illusion

The mistaken tendency of individuals to focus on nominal dollar values rather than inflation-adjusted real values when making economic decisions.

Nominal Wage Rigidity

The reluctance of employers to cut nominal wages, opting instead to keep nominal wage growth at $0\%$, which results in negative real wage growth when prices rise.

Money

Any generally accepted means of payment that performs four essential functions: medium of exchange, unit of account, store of value, and memory of the economy.

Medium of Exchange

The function of money whereby it serves as the universally recognized instrument that people trade directly for goods and services.

Barter

The direct trade of commodities or services for other commodities or services without the intermediary use of money.

Double Coincidence of Wants

A necessary condition for barter exchange in which each trade partner must hold the exact good or service that the other partner desires.

Commodity Money

A form of money consisting of a physical good with intrinsic value that everyone accepts in exchange for other goods and services, such as gold, silver, cigarettes, or pouches of mackerel.

Commodity-Backed Money

A currency system where circulating paper money can be redeemed for a fixed, guaranteed quantity of a physical commodity, such as gold or silver.

Fiat Money

Currency with no intrinsic value that functions as money due to government mandate and widespread public acceptance.

Unit of Account

The function of money that provides a standardized common measure and language of value, allowing prices to carry clear market signals.

Store of Value

The property of money that allows purchasing power to be preserved and transferred from the present into the future.

Memory of the Economy

The property of money functioning as an imperfect ledger that tracks and confirms that recent transactions took place.

Cryptocurrency

A software object with digital units or 'tokens' that can be transferred securely and verifiably between owners across a network.

Blockchain

A decentralized, distributed digital ledger technology that verifies and records transactions across a computer network without a central governing authority.

Asset

A resource with economic value that an individual, corporation, or country owns with the expectation that it will generate future benefits.

M1 Money Stock

A measure of highly liquid, readily available money that consists of currency, checkable deposits (demand deposits), and, since May 2020, savings deposits.

M2 Money Stock

A broad measure of the money supply that encompasses all of M1 plus money market mutual funds and small-denomination time deposits under $\$100{,}000$.

Credit Cards

Financial instruments representing pre-approved loans extended at the point of sale, which are not counted as money and are excluded from both M1 and M2.