Economics 102: Macroeconomics Ch 5. Inflation Measurement and Adjustment

Inflation

a sustained increase in the average level of prices in the economy

Deflation

a sustained decrease in the level of prices in an economy

Inflation Rate

the rate at which prices are increasing

Consumer Price Index (CPI)

• an index measuring the level of prices in the economy, comparing them to previous years in order to gauge the level of inflation in an economy

• reveals to the capacity of our money to buy goods and services

Purchasing Power

represents the amount of goods and services that $1 will buy

Nominal Terms

shown in actual numbers, before adjusting for changes in level of prices

Real Terms

shown as numbers that already reflect changes in price level (after inflation)

If the Consumer Price Index rises from 101 to 104, which of the following statements is true?

1. Household income rises by 2.97%.

2. The average level of prices for a fixed basket of goods and services falls by 2.97%.

3. The prices for all goods in the economy fell by 2.97%.

4. Household income decreases by 2.97%.

5. The prices for goods in the economy rose by 2.97%.

The prices for goods in the economy rose by 2.97%.

If Mary's nominal income rises by 4%, while her real income fell by 2%, what happens to the level of prices?

1. Prices increase by 6%.

2. Prices decrease by 6%.

3. Prices decrease by 2%.

4. Prices increase by 2%.

5. Prices remain constant.

Prices increase by 6%.

What does the Consumer Price Index measure?

1. Changes in the price level of an economy

2. Changes in unemployment

3. Changes in depreciation

4. Changes in tax rates

5. Changes in the quantity supplied in an economy

Changes in the price level of an economy

What is the real interest rate when the nominal interest rate on a bank checking account is 1%, and the rate of inflation is 2%?

1. -3%

2. -1%

3. ½%

4. 3%

5. 1%

-1%

Which of the following statements is FALSE regarding inflation?

1. It is the opposite of deflation.

2. During the 1970s, it was extremely low.

3. It can be calculated from the Consumer Price Index.

4. It means that purchasing power decreased.

5. It represents a sustained increase in the price level in an economy.

During the 1970s, it was extremely low.