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Chapter 6

Chapter 6 Measuring the Price Level and Inflation

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ECON 1100
Eveline Adomait

Chapter 6: Measuring the Price Level and Inflation Thursday, January 24, 2013 1:51 PM 6.1 The Consumer Price Index: Measuring the Price Level Definitions Price Level- the overall level of prices at a point in time as measured by a price index such as the CPI Consumer Price Index (CPI)- for any period , measures the cost in that period of a standard basket of goods and services relative to the cost of the same basket of goods and services on a fixed year, called the base 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 6.2 Inflation Definitions 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 6.3 Adjusting for Inflation Definitions Normal 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 a specified price index; prevents the purchasing power of the nominal quantity from being eroded by inflation 6.4 Nominal Versus Real Interest Rates Definitions Nominal Interest Rate- the type of interest rare you usually encounter in everyday life-the price paid per dollar borrowed per year Real Interest Rate- the nominal interest rate minus the inflation rate Anticipat
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