Question 1

What is inflation?

Accepted Answer

The general rising of prices in a market or aggregate economy over time

Question 2

What is deflation?

Accepted Answer

The general decrease of prices in a market or aggregate economy over time

Question 3

What is disinflation?

Accepted Answer

A decrease in the rate of inflation

Question 4

What is the inflation rate?

Accepted Answer

The percent change in aggregate price level across an entire economy in one year

Question 5

What are real variables?

Accepted Answer

Variables where the effects of inflation have been factored out

Question 6

What is the consumer price index basket?

Accepted Answer

A sample of goods and services that are typically bought by your average household

(see market basket)

Question 7

What is the difference between inflation and deflation?

Accepted Answer

Inflation is an increase in prices and deflation is a decrease in prices

Question 8

How is the CPI calculated?

Accepted Answer

Divide the cost of the market basket in one year by the cost of the market in the base year and multiply by 100

Question 9

What is a market basket?

Accepted Answer

A market basket is a collection of goods and services used to measure the changes in the cost of living over time

(e.g., CPI basket)

Question 10

How is the CPI used?

Accepted Answer

It measures  changes in the cost of living over time and is often used to adjust wages, Social Security payments, and other income for inflation

It is also used to make international comparisons of inflation rates and to inform policy decisions related to monetary policy

Question 11

What is the CPI (consumer price index)?

Accepted Answer

A measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services

Question 12

What is substitution bias?

Accepted Answer

When consumers switch to cheaper goods due to inflation

If the CPI does not take into account these substitutions, it may overstate the actual increase in the cost of living

Question 13

What is the purpose of the CPI?

Accepted Answer

The purpose of the CPI is to measure inflation and to provide an indication of the changing cost of living

2.4 Price Indices and Inflation, AP Macroeconomics Flashcards