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ECO 3341 Lecture Notes - Deflation

Inflation is defined as the rise in the average level of prices in money terms. Deflation is the fall in the average level of prices. Inflation and deflation can distort our measurement of any economic variable that is expressed in money terms. To gauge economic activity accurately, economists need a way to counteract the distorting effects of price level changes on the economic variables we observe. United states is currently using 1982 as their base year: calculate the price index.

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<div>Deflation is a/an ____________ in the average level of prices of goods and services.</div>

<div>which of the following statements concerning price indexes is not accurate?</div>
<div>a. Price indexes produce an average of prices that economists can compare to earlier averages.</div>
<div>
<div><span data-chanswerdiv='{"question_id": 29, "top": 597,  "bottom": 608.75, "left": 76, "right": 445.55078125}'>b. Price indexes assist consumers and businesses in making economic decisions.</span></div>
<div><span data-chanswerdiv='{"question_id": 29, "top": 620,  "bottom": 631.75, "left": 76, "right": 378.3515625}'>c. Price indexes assist the government in making policy decisions.</span></div>
<div>d. Price indexes define the cost of goods in the entire economy at a given point in time.</div>
</div>

<p>Measures of Inflation The GDP deflator is the broadest, most inclusive measure of change in the country's price level since it includes all final goods and services produced and sold. But the GDP deflator is not used by the government or economists as the benchmark measure of inflation; instead, the consumer price index (CPI) is used to determine changes in the cost of living. What is the shortcoming of the GDP deflator as a measure of inflation for households, and why is the CPI considered to be a more useful measure?</p>

ECO 3341 Lecture Notes - Deflation

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