Measuring the Price Level and Inflation

These flashcards cover key concepts related to measuring inflation and price levels, including definitions of essential terms and their significance.

Consumer Price Index (CPI)

A measure of the cost of living that reflects the prices of a standard basket of goods and services compared to a base year.

Inflation

The percentage change in the Consumer Price Index (CPI), indicating the rate at which the general level of prices for goods and services rises.

Nominal Value

The value of a quantity measured in current dollars, not adjusted for inflation.

Real Value

The value of a quantity adjusted for inflation, reflecting the purchasing power.

CPI Bias

Factors that can distort the Consumer Price Index, such as quality bias and substitution bias.

Quality Bias

A bias in the CPI that occurs when it fails to account for changes in the quality of goods and services.

Substitution Bias

A bias in the CPI that arises when consumers switch to cheaper alternatives, which is not reflected in the index.

Shoe-Leather Costs

The costs incurred by people who reduce their cash holdings and visit banks more often due to inflation.

Bracket Creep

The phenomenon where inflation pushes individuals into higher income tax brackets, leading to increased taxes.

Fisher Effect

The relationship describing how nominal interest rates adjust to changes in inflation rates.