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