Inflation and Price Level Concepts

These flashcards cover key vocabulary and concepts related to inflation, price levels, and economic indices based on the lecture notes.

Price Level

The weighted average price of all goods and services in the economy.

Price Index

The normalized version of price level, often set with a base value of 100.

Consumer Price Index (CPI)

An index that uses fixed weights based on households' consumption in a base year.

Personal Consumption Expenditure Index (PCE)

An index that uses chained weights to measure changes in the price of goods and services.

GDP Deflator

An index that measures the difference between nominal GDP and real GDP.

Federal Reserve (The Fed)

Uses PCE for inflation measurement in monetary policy.

Inflation

The growth rate of prices in the economy, denoted as πt.

Basket of Goods

A collection of goods and services typically purchased by consumers.

Bureau of Labor Statistics

Conducts surveys to determine the basket of goods for the CPI.

Inflation Rate Formula

πt = (Pt - Pt-1) / Pt-1, where Pt is the price index.

Nominal Value

The value of an economic variable unadjusted for inflation.

Real Value

The value of an economic variable adjusted for inflation.

Real Interest Rate

The return to saving in terms of a basket of goods after accounting for inflation.

Fisher Equation

A formula that states: 1 + r ≈ (1 + i) / (1 + πt+1).

Nominal Interest Rate (i)

The stated interest rate before taking inflation into account.

Real Goods

Goods valued in terms of purchasing power.

Investment

The action of allocating resources, usually financial, for future income.

Logarithmic Approximation

A mathematical technique used in the Fisher equation to simplify calculations.

Low Inflation and Interest Rates

Conditions under which the Fisher equation is a good approximation.

Expenditure Survey

A survey conducted to determine household consumption patterns and update the basket of goods.

Normalized CPI Calculation

CPI = (Price of basket at time t / Price of basket at base year) × 100.