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Questions and Answers
_____________ implies that pressure for price increases reaches across _______________ markets, not just one.
_____________ implies that pressure for price increases reaches across _______________ markets, not just one.
inflation; most
The effects of inflation are seen in:
The effects of inflation are seen in:
- Goods, services, wages and income levels (correct)
- Goods and services only
- Wages and income levels only
- Services and wages only
If the price index moves from 107 to 110, the rate of inflation is:
If the price index moves from 107 to 110, the rate of inflation is:
- 3%
- 2.8% (correct)
- 28%
- 30%
The most commonly cited measure of inflation in the United States is:
The most commonly cited measure of inflation in the United States is:
Two factors that complicate the calculation of the inflation rate are:
Two factors that complicate the calculation of the inflation rate are:
In the early 1990's extremely high inflation rates of 2500% were common in Russia. During that time, we can say that as a result of those inflation rates, Russia was experiencing:
In the early 1990's extremely high inflation rates of 2500% were common in Russia. During that time, we can say that as a result of those inflation rates, Russia was experiencing:
With regard to the economy, the term negative inflation is synonymous with which of the following?
With regard to the economy, the term negative inflation is synonymous with which of the following?
What distinguishes the real value of a statistic from the nominal value of a statistic?
What distinguishes the real value of a statistic from the nominal value of a statistic?
Nancy's union has negotiated a three-year wage contract that provides for a 2.4% increase indexed to inflation. The rates of inflation are forecast to be 1.62%, 1.93% and 2.21% respectively. How will Nancy's wage increase be expressed in the new contract?
Nancy's union has negotiated a three-year wage contract that provides for a 2.4% increase indexed to inflation. The rates of inflation are forecast to be 1.62%, 1.93% and 2.21% respectively. How will Nancy's wage increase be expressed in the new contract?
ABC Bank targets a real interest rate of 4% on their loans. The anticipated future inflation rate is 2%. What is the nominal interest rate they will charge a borrower?
ABC Bank targets a real interest rate of 4% on their loans. The anticipated future inflation rate is 2%. What is the nominal interest rate they will charge a borrower?
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Study Notes
Inflation Concepts
- Inflation affects pricing across most markets rather than being confined to one sector.
- It encompasses various aspects of the economy, impacting goods, services, wages, and income levels.
Measuring Inflation
- A price index increase from 107 to 110 indicates a 2.8% inflation rate.
- The Consumer Price Index (CPI) is the primary measure of inflation in the United States.
- Complications in calculating the inflation rate arise from substitution effects and quality/new product bias.
Hyperinflation and Deflation
- Hyperinflation is characterized by exceptionally high inflation rates, such as the 2500% observed in early 1990s Russia.
- Negative inflation is referred to as deflation, indicating a decline in overall price levels within the economy.
Real vs. Nominal Values
- The distinction between real and nominal statistics comes from adjusting for inflation.
- Real values provide a more accurate picture of economic variables by accounting for inflationary impacts.
Wage Contracts and Interest Rates
- Wage increases tied to inflation, such as Nancy's 2.4% increase indexed to inflation, would be expressed as "COLA plus 2.4%."
- A bank aiming for a real interest rate of 4% while anticipating a 2% inflation rate would charge a nominal interest rate of 6%.
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