2.2 Inflation (Price Level)

Define Inflation

A general rise in prices

What does CPI stand for and what does it do?

CPI stands for Consumer Price Index and it measures the cost of a fixed basket of consumer goods and services and compares the basket cost to a base period.

How do you calculate CPI?

(Current year / Base year) x 100

*gives you how prices increased

How do you calculate inflation rate?

(New CPI - Old CPI / Old CPI) x 100

Does inflation cause low or high unemployment?

Low unemployment

Does deflation cause low or high unemployment?

High unemployment

What inflation rate is Creeping?

1%- Under 4% annually

What inflation rate is Galloping?

100-300%

What inflation rate is Hyper?

500%

What is the FED’s target for inflation rate?

2%

What is Demand-pull inflation?

Demand exceeds supply creating shortages

What is Cost-push inflation?

Costs put onto consumers in the form of higher prices, supply decreases, cost of goods/services increase.

Define Wage-price Spiral?

Cost of living argument, keep “even” with inflation, saving erodes, fixed incomes sufer.

Who is hurt by inflation?

Fixed income receivers, savers, and creditors.

Who is less affected by inflation?

Flexible income receivers, debtors, and government benefits big time.