Principles of Macroeconomics - Chapter 9 Inflation

These flashcards cover key concepts from Chapter 9 on inflation in macroeconomics, including definitions and explanations of essential terms.

Inflation

A general and ongoing rise in the level of prices in an entire economy.

Basket of goods and services

A hypothetical group of different items representing a typical set of consumer purchases used to calculate price levels.

Consumer Price Index (CPI)

A measure of inflation calculated based on the price level from a fixed basket of goods and services.

Substitution bias

An inflation rate that tends to overstate the true cost of living rise because consumers can substitute away from goods whose prices rise.

Core inflation index

An index that excludes volatile economic variables like energy and food prices to show underlying price trends.

Producer Price Index (PPI)

A measure of inflation based on prices paid for supplies and inputs by producers.

Hyperinflation

An outburst of high inflation that often occurs when economies shift from a controlled economy to a market-oriented economy.

Deflation

Severe negative inflation where most prices in the economy are falling.

Indexing

Adjusting prices, wages, or interest rates automatically for inflation.

Cost-of-living adjustments (COLAs)

Contractual provisions ensuring wages will keep up with inflation.

Adjustment of Minimum Wage

The decrease in purchasing power of the federal minimum wage after adjusting for inflation.

Quality/New Goods Bias

An inflation measure that often overstates the true rise in cost of living due to not accounting for quality improvements or new goods.

Unintended redistributions of purchasing power

Occurs when inflation affects individuals differently, resulting in some losing purchasing power.

Employment Cost Index

A measure of inflation based on wages paid in the labor market.