ECON 3212 – Exam 2 Study Guide: Inflation and Interest Rates

A collection of vocabulary flashcards focused on key terms and definitions related to inflation and interest rates.

Price Level

Measures average prices of goods and services in an economy.

Inflation

A rise in the overall price level and reduction in purchasing power.

Inflation Rate Formula

(New - Old) / Old * 100 to calculate annual % change in price level.

CPI (Consumer Price Index)

Average price of a market 'basket' of goods purchased by a typical urban family of 4.

Substitution Bias

CPI assumes consumers buy the same quantity of each good in its fixed basket, ignoring substitutes.

Quality Change Bias

CPI does not account for improvements in quality over time.

New Product Bias

CPI doesn't immediately capture new products entering the market.

Outlet Bias

CPI data collection might miss outlet stores, sales, discounts, and coupons.

PCE (Personal Consumption Expenditures)

Measures domestic purchases of households and is used by the Fed as a pricing measure.

Core PCE

Excludes food and energy prices due to their volatility.

PPI (Producer Price Index)

Reflects the price producers pay at all stages of production, indicating future price changes.

Nominal Interest Rate

The opportunity cost of holding money or the rate investors pay for a loan.

Real Interest Rate

Return to savings and true cost of borrowing, adjusted for inflation.

Fisher Equation

i = r + π, relating nominal interest rate, real interest rate, and inflation.

Fisher Effect

A 1% increase in inflation causes a 1% increase in nominal interest rates.

Ex Ante Real Interest Rate

Anticipated real interest rate when the loan is made.

Ex Post Real Interest Rate

Real interest rate realized after the loan is repaid and actual inflation is known.

Inflation Tax

Loss of value by holders of cash and bonds due to inflation.

Shoe Leather Costs

The increased costs of transactions caused by inflation and the decreased value of money.

Menu Costs

Costs incurred by firms when they change their prices.

Redistribution of Wealth

The shift in economic advantage between debtors and creditors due to unexpected inflation.

Fixed Income

Income that does not change with inflation, often affecting social security recipients.

Deflation

A decrease in the general price level of goods and services.

Disinflation

A decrease in the rate of inflation; prices are rising at a slower rate.

Real Wage

Nominal wage adjusted for inflation.

Nominal Wage

The wage paid in current dollars, without adjustment for inflation.

Purchasing Power

The value of currency in terms of the amount of goods or services that can be purchased.

CPI Basket

A fixed set of goods and services used to track price changes over time.

Inflation Rate

The percentage increase in the general price level over a period of time.

Interest Rate

The percentage charged on a loan or paid on savings.

Borrower

An individual or entity that takes out a loan.

Lender

An individual or entity that provides funds in the form of a loan.

Anticipated Inflation

Expected increase in prices over a future period.

Actual Inflation

The increase in prices that actually occurs over a specified period.

Economic Forecasting

Estimating future trends in economic variables such as inflation.

Bond Prices

The market value of bond securities that tends to move inversely with interest rates.

Inflation Adjustment

Modification of financial figures to account for inflation's effect over time.

Capital Gains Tax

Tax on price increases of an asset that has been sold.

Inflation Risk

The potential loss of purchasing power due to rising prices.

Consumer Behavior

The spending habits of individuals and households concerning their finances.

Market Basket

A representative collection of goods and services used to measure price levels.

Interest Rate Risk

The risk that an investment's value will change due to fluctuations in interest rates.