CPI and Inflation Quiz 21 Questions and Answers,100% CORRECT

CPI and Inflation Quiz 21 Questions and Answers Inflation - Correct AnswersAn increase in the overall level of prices in the economy Core 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