Chapter Five: Module Summary -- Inflation

  • Stabilization policy is policy that is aimed at reducing the fluctuations in the business cycle.

  • The goals of Stabilization Policy are to achieve stable prices, full employment, and high rates of economic growth.

  • A price index is a device for measuring price level changes by tracking the price of a designated bundle of goods and services through time with respect to a base year. The most widely used price index in the economy is the CPI. The CPI stands for the Consumer Price Index.

  • The inflation rate is the percent change in the price index from one year to the next.

  • A nominal value is not corrected for the effects of inflation. A real value is corrected for the effects of inflation.

  • Deflating is the process of deriving the real value of some nominal value by dividing by an appropriate price index.

  • Inflation is a sustained increase in the price level. The Price Level is the weighted average of all prices in the economy.

  • Inflation rates in the United States have been relatively low since 1983. Before then, inflation was much more of a problem.

  • The costs of inflation depend upon whether inflation is anticipated or unanticipated.

  • The costs of anticipated inflation are shoe-leather costs, menu costs, and tax costs if the tax code is not perfectly indexed to inflation.

  • The costs of unanticipated inflation are the arbitrary redistribution of income and inflation uncertainty.

  • Hyperinflation is inflation that proceeds at exceptionally high rates. The United States has never experienced hyperinflation, except for the South during the Civil War.

  • Inflation can come from either the demand side or the supply side of the economy. Demand-pull inflation is inflation due to increases in demand for goods and services. Cost-Push Inflation is inflation due to increases in the costs of production.

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