How can we help?

You can also find more resources in our Help Center.

30 terms

Principles of Macroeconomics (Frank, 2E) Chapter 6

STUDY
PLAY
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