Principles of Macroeconomics (Frank, 2E) Chapter 6

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consumer price index (CPI)

for any period, measures the cost in that period of a standard basket of goods and services relative to the base year

base year

the cost of the same basket of goods and services in a fixed year

price index

a measure of the average price of a given class of goods or services relative to the price of the same goods and services in a base year

rate of inflation

the annual percentage rate of change in the price level as measured, for example, by the CPI

deflation

a situation in which the prices of most goods and services are falling over time so that inflation is negative

nominal quantity

a quantity that is measured in terms of its current dollar value

real quantity

a quantity that is measured in constant dollar terms

deflating (a nominal quantity)

the process of dividing a nominal quantity by a price index (such as the CPI) to express the quantity in real terms

real wage

the wage paid to workers measured in terms of real purchasing power

indexing

the practice of increasing a nominal quantity each period by an amount equal to the percentage increase in specific price index

nominal interest rate

everyday interest rate -- the price paid per dollar borrowed per year

real interest rate

the nominal interest rate minus the inflation rate

anticipated inflation

when the rate of inflation turns out to be roughly what most people had expected

unanticipated inflation

when the rate of inflation turns out to be substantially different from what most people had expected

Fisher effect

the tendency for nominal interest rates to be high when inflation is high and low when inflation is low

quality adjustment bias

increase in the CPI that is due to the reluctance of government statisticians to make quality adjustments as large as some economist think appropriate

substitution bias

ignoring the fact that consumers can switch from more expensive to less expensive goods, leading to overestimates of the true increase in the cost to consumers of achieving a given level of utility or consumer satisfaction

price level

the overall level of prices at a point in time as measured by a price index such as the CPI

relative price

the price of a specific good or service in comparison to the prices of other goods and services

zero inflation

when the price level stays roughly constant from one year to the next

stable inflation

when the inflation rate stays roughly constant from one year to the next

accelerating inflation

when the inflation rate rises from one year to the next

disinflation

when the inflation rate falls from one year to the next

low inflation

typically means inflation between 1 and 3 percent per year

moderate inflation

typically means inflation between 3 and 6 percent per year

high inflation

typically means inflation greater than 6 percent per year

hyperinflation

typically means inflation greater than 500 percent per year

price signal distortion hypothesis

the claim that any substantial amount of change in the price level will make it difficult for market participants to interpret the extent to which price changes involve relative price changes

downward nominal wage rigidity hypothesis

the claim that low levels of inflation will reduce efficiency because real wage cuts will then typically require nominal wage cuts, which will be resisted

zero bound on nominal interest rates hypothesis

the claim the because interest rates cannot go below zero, a central bank may be unable to stimulate the economy with rate cuts if the official interest rate is low to being with

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