Macroeconomics - Inflation and Price Levels

Flashcards covering key concepts about inflation, GDP deflator, CPI, and related effects.

Inflation

The rate of increase in prices calculated as the year-over-year percentage increase in a price level index.

Deflation

A situation of falling prices, also known as negative inflation.

GDP Deflator

The ratio of nominal GDP to real GDP; it measures how prices of goods produced have changed since the base period.

Nominal GDP

The summation of current prices multiplied by the quantity produced of a good during that year.

Real GDP

The summation of base year prices multiplied by the quantity produced of a good during the current year.

Consumer Price Index (CPI)

A measure of the cost of consuming a basket of goods in the current year divided by the cost of the same basket in the base year.

Steps to Calculating Inflation using CPI

1) Survey urban consumers to determine CPI baskets, 2) Find the price of each good in each year, 3) Compute costs of CPI baskets.

Hyperinflation

An extremely high and typically accelerating inflation rate that can severely erode the purchasing power of a currency.

Unexpected Inflation

Inflation that differs from what was anticipated, leading to a redistribution of wealth.

Real Wages

Wages adjusted for inflation; reflecting the purchasing power of income.

Wealth Redistribution from Inflation

Occurs when actual inflation differs from expected inflation, impacting both borrowers and lenders or employers and employees.