A sustained rise in the overall level of prices across an economy, rather than a jump in the price of one good, is called inflation.
Missing Word
inflation
Inflation is a general and ongoing increase in the price level, measured with a price index for a broad basket. A higher price for one item alone does not count.
Category: Inflation Basics
Question 2
A sustained fall in the overall price level, which raises the purchasing power of each dollar, is called deflation.
Missing Word
deflation
Deflation is negative inflation: prices on average are falling. The United States saw severe deflation during the Great Depression of the 1930s.
Category: Inflation Basics
Question 3
An extremely rapid rise in prices, with the price level sometimes climbing thousands of percent in a single year, is called hyperinflation.
Missing Word
hyperinflation
Hyperinflation is inflation so extreme that money quickly loses its value and people stop wanting to hold it. Russia in the early 1990s and Zimbabwe in the 2000s are commonly cited examples.
Category: Inflation Basics
Question 4
A wage, price, or interest rate that is adjusted automatically whenever the price level rises is said to be indexed.
Missing Word
indexed
An indexed payment rises along with a price index, so its purchasing power is protected. Social Security benefits and U.S. income tax brackets are examples.
Category: Indexing
Question 5
Economists measure the price level by tracking the total cost of a fixed set of goods and services called a basket, a name borrowed from the hand-held container shoppers fill at a grocery store.
Missing Word
basket
The basket represents what typical buyers purchase, and a price index compares its cost in each period with its cost in the base year. Holding the contents fixed means the index changes only because prices change, not because people buy different things.
Category: Measuring Prices
Question 6
Subtracting the rate of price increase from the stated rate on a loan gives the real interest rate, which measures the gain in purchasing power.
Missing Word
real
The real interest rate is the stated rate minus inflation. If a loan carries 6% interest and prices rise 2%, the lender's purchasing power grows by only about 4%.
Category: Real Versus Nominal
Question 7
A price index is a weighted average of many prices, so goods that take up a larger share of household spending count for more.
Missing Word
weighted
Each item in a price index is weighted by how much consumers actually buy of it. A simple average would give a rarely bought item as much influence as a staple purchased every week.
Category: Measuring Prices
Question 8
Because Congress raises it only from time to time instead of indexing it, the federal minimum wage loses purchasing power as prices climb between increases.
Missing Word
minimum
The federal minimum wage is written into law in nominal dollars and is not adjusted automatically for inflation. Between increases, rising prices erode what each hour of pay can buy, so minimum-wage workers are among those who lose when prices rise.
Category: Winners and Losers
Question 9
The most widely reported U.S. price measure, which tracks the cost of the goods and services a typical urban household buys, is known by the abbreviation CPI.
Missing Word
CPI
CPI stands for Consumer Price Index. It follows a fixed basket of household purchases, so it is the standard gauge of how prices change for consumers.
Category: Measuring Prices
Question 10
An index with fixed contents overstates how much more households must spend because it ignores consumers buying less of goods whose prices have risen and more of cheaper alternatives, a flaw named substitution bias after the behavior it overlooks.
Missing Word
substitution
When one good's relative price rises, people shift toward alternatives, but a fixed basket assumes they keep buying the same amounts. Substitution bias therefore makes the index rise faster than the true cost of living.
Category: Price Indexes and Bias
Question 11
When a government legally prevents most prices from rising, measured price increases stay low, but buyers face persistent shortages of goods.
Missing Word
shortages
A law that keeps prices from rising acts like a price ceiling. When the legal price sits below equilibrium, quantity demanded exceeds quantity supplied, as happened in the Soviet Union.
Category: Inflation History
Question 12
A traditional defined benefit pension pays retirees a set number of dollars each month, so what each payment can buy shrinks when prices rise.
Missing Word
benefit
A defined benefit pension promises a fixed nominal payment, so inflation erodes what each check can buy. In a defined contribution plan, such as a 401(k), the worker's invested account can earn returns that keep pace with inflation, though the worker bears the investment risk.
Category: Winners and Losers
Question 13
The index that tracks prices at earlier stages of production, covering raw materials, intermediate goods, and finished goods sold by firms rather than retail prices paid by households, is known by the abbreviation PPI.
Missing Word
PPI
PPI stands for Producer Price Index. It measures prices at the producer level rather than the retail level, and it is broken down by industry, commodity and stage of processing. Because these goods feed into what consumers eventually buy, rising producer prices can signal later increases in consumer prices.
Category: Measuring Prices
Question 14
The GDP deflator covers the prices of all four spending components of GDP: consumption, government purchases, net exports, and investment.
Missing Word
investment
Investment is spending by firms on new capital goods such as machinery and buildings, plus new housing. Because the GDP deflator includes it, the deflator measures prices of all output rather than the household cost of living.
Category: Measuring Prices
Question 15
An index that covers only what households buy, rather than all of the economy's output, is designed to track changes in the cost of living.
Missing Word
living
The cost of living is what a household must spend to keep up its standard of consumption. The Consumer Price Index is built for this purpose, while the GDP deflator covers all output, including investment and government purchases.
Category: Measuring Prices