01
Front
What is inflation?
Back
Inflation is a sustained rise over time in the overall price level, which reduces the purchasing power of money.
Free Online Flashcard Deck
3 Understanding Inflation Free Online FlashCards
Study 3 Understanding Inflation with 12 free online flashcards. Review key terms, definitions, and concepts with this interactive flashcard deck.
12 cards
02
Front
What does a falling but positive inflation rate mean?
Back
Prices are still rising, but at a slower rate. The inflation rate has fallen without going below zero.
03
Front
What is deflation?
Back
Deflation is a sustained fall in the overall price level.
04
Front
What does the Consumer Price Index (CPI) measure?
Back
The Consumer Price Index (CPI) tracks price changes in a representative basket of consumer purchases. Its categories have different weights reflecting their importance in consumer spending.
05
Front
Which prices does the GDP price index track?
Back
The GDP price index tracks prices of goods and services produced in the United States, including exports but excluding imports.
06
Front
How is inflation between two periods calculated from a price index?
Back
Calculate the index’s percentage change: Inflation rate=earlier indexlater index−earlier index×100%.
07
Front
Why might a household’s cost of living change differ from the CPI?
Back
A price index summarizes average price changes, not every household’s experience. Spending patterns differ, so personal living costs may rise faster or slower than the index.
08
Front
How do nominal and real values differ?
Back
Nominal values use the dollars of the period recorded; real values adjust for price changes. Nominal GDP uses current prices, while real GDP adjusts for price changes.
09
Front
How can real growth be approximated from nominal growth and inflation?
Back
A useful approximation is real growth≈nominal growth−inflation rate. For example, a nominal pay rise of 5% with 3% inflation means real wage growth of about 2%.
10
Front
What causes demand-pull inflation?
Back
Demand-pull inflation occurs when overall spending grows faster than the economy’s ability to produce goods and services, allowing sellers to raise prices.
11
Front
How can inflation expectations help inflation persist?
Back
Expectations of continued price rises can lead firms to raise prices in anticipation of higher costs and workers to seek higher wages, helping inflation persist.
12
Front
When does inflation reduce a household’s purchasing power?
Back
When incomes do not keep pace with prices, inflation reduces purchasing power. Those whose wages or benefits adjust slowly may lose ground.
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