ECON EXAM 2

Inflation

The growth in the overall level of prices in the economy.

Deflation

Occurs when overall prices fall, representing negative inflation.

Consumer Price Index (CPI)

A measure that tracks the price of a typical 'basket' of goods and services purchased by consumers to measure inflation.

GDP Deflator

Measures the price level of all final goods and services in GDP, while the CPI includes only consumer purchases.

Measuring Inflation

Typically measured in the U.S. using the CPI, which calculates the change in price levels.

Shoe-leather costs

The resources wasted when people change their behavior to avoid holding money, going to the bank more often.

Money illusion

Occurs when people mistake nominal price changes for real price changes and make decisions based on these mistaken perceptions.

Menu costs

The costs businesses incur when they have to change prices, such as printing new menus or adjusting labels.

Fisher Equation

Real Interest Rate = Nominal Interest Rate - Inflation Rate.

Loanable Funds Market

The market where savers supply funds for loans to borrowers.

Interest Rate

The price of borrowing or lending funds, expressed as a percentage of the loan amount.

Nominal Interest Rate

The stated interest rate before inflation is taken into account.

Real Interest Rate

The nominal rate adjusted for inflation.

Crowding out effect

Occurs when government spending increases, leading to higher interest rates, which can reduce private investment.

Compounding

Earning interest on both the original amount saved and on the interest that has already been added to the account.

Long-run economic growth

Involves improvements in living standards and increases in wealth due to better resources, technology, and institutions.

Natural capital

Physical land, minerals, and geographical advantages that contribute to economic wealth.

Frictional Unemployment

Temporary unemployment that occurs when individuals are between jobs or entering the workforce.

Structural Unemployment

Occurs when there is a mismatch between workers' skills and the jobs available.

Demand-pull inflation

Inflation resulting from increased demand for goods and services.

Cost-push inflation

Inflation caused by increases in production costs.

Phillips Curve

Shows the inverse relationship between inflation and unemployment.

Recessionary gap

Occurs when actual GDP is below potential GDP, indicating underperformance in the economy.

Budget Deficit

When the government's spending exceeds its revenue in a given year.

National Debt

The cumulative total of all past budget deficits that the government owes.