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Economics Ch.7

QuestionAnswer
Inflation an increase in the general price on certain products. Impacts consumer
Deflation a decrease in the general price of certain goods. Impacts producer
CPI The most widely reported measure of inflation. measures changes in the average prices of consumer goods and services. Formula: Cost of product current year/cost of products base year X100
Annual rate of inflation CPI given year - CPI previous year/ CPI previous year X100
Disinflation decrease in the rate of inflation
Consequences of inflation Shrinks income, changes wealth distribution, changes real interest rate.
Real Income formula nominal income/ CPI as decmial X100
Nominal Income number of dollars received over a period of time
Real Income adjusted for changes in the CPI
if nominal income doesn't keep up with inflation lose purchasing power
if nominal income rise faster than the rate of inflation gain purchasing power
Nominal Interest rate the actual rate of interest without adjustment for the inflation rate
Real interest rate Normal rate of interest minus the inflation rate
when the real rate of interest is negative lenders and savers lose. Means inflation rate exceeds the nominal rate of interest
Demand-pull inflation caused by consumers overspending ( a rise in the general price level resulting from an excess of total spending (demand) Ex:Excessive aggregate spending
Cost-push inflation price rise from increase in production cost. caused by the producer. caused by: labor cost increases. energy cost increases. raw material cost increases.
Losers from inflation include: those on a fixed income and savers.
When the inflation rate rises, the purchasing power of nominal income decreases
During periods of hyperinflation, which of the following is the most likely response of consumers? Spend money as fast as possible.
Real income for a given year would be less than nominal income in that year if: the consumer price index was greater than 100 in that year.
Who benefits from inflation Borrowers
real interest rates increase if nominal interest rates remain the same and the inflation rate falls
redistribution of wealth from borrowers to lenders occurs when the rate of inflation in a given time period turns out to be lower than lenders and borrowers anticipated.
Created by: burdeshawgirl
 

 



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