CPI and Inflation Quiz 21 Questions and Answers
Inflation - Correct AnswersAn increase in the overall level of prices in the economy
Core
... [Show More] Inflation - Correct AnswersInflation from CPI minus food and energy
Concumer Price Index (CPI) - Correct AnswersFor any period, it is the cost in that period of a standard basket of goods and services in a fixed year, called a base year
Price of basket goods and services in current year/ Price of basket in base year X 100 - Correct AnswersEquation for CPI
GDP Deflator - Correct Answersreflects prices of all goods and services produced within the country
CPI - Correct Answersreflects the prices of a representative basket of goods and services purchansed by the consumers
CPI - Correct Answersuses a fixed basket of goods and services
GDP Deflator - Correct Answerscompares price of currently produced goods relative to price of goods in the base year
CPI(current year) - CPI(base year)/CPI(base year) X 100 - Correct AnswersEquation for Inflation Rate
Indexing - Correct AnswersPractice of increasing a nominal quantity each period by an amount equal to the percent increase in a specific price index.
Indexing - Correct AnswersPrevents the purchasing power of the nominal quantity from being eroded by inflation
Nominal Quantity - Correct AnswersQuantity that is measured in terms of a current dollar value
Real Quantity - Correct AnswersQuantity measured in physical terms
Substitution Bias - Correct AnswersPrice of a good or service increases, CPI assumes same amount of purchasing, but people buy a different good
Overstates Inflation
Quality Adjustment Bias - Correct AnswersCPI does not account for the increased quality and value of a good
Overstates Inflation
Introduction of New Goods - Correct AnswersCPI keeps a standard basket of goods and services, which means it does not allow for the introduction of new goods with cheaper prices often associated with new technology products
Overstates inflation
Shoe Leather Costs - Correct AnswersCosts associated with managing money holdings
as inflation goes up, cash holdings decrease in value
A Cost of Inflation
Distortions in the Tax System - Correct AnswersTaxes based on income
Inflation raises wages nominally, but not in real terms
Wages go up with inflation, but moved to higher tax bracket
A Cost of Inflation
Unexpected Redistribution of Wealth - Correct AnswersHigh inflation makes the real value of debt go down
Banks set interest rates based on expected inflation.
If inflation is higher than expected, banks make a smaller return
A Cost of Inflation
nominal interest rate (i) = real interest rate (r) + expected inflation (pi^e) -> r = i - pi - Correct AnswersEquation for Unexpected Redistribution of Wealth
Noisy Signal - Correct AnswersIt is difficult to distinguished upward pressure on prices due to either demand or inflation.
Higher demand means you ramp up production, but not inflation.
A Cost of Inflation [Show Less]