Econ E2

CPI uses a fixed basket of goods, it will assume people are still buying the same amount of the relatively expensive products

The CPI tends to overstate inflation because of the following biases: Substitution bias - when the price of a product in the consumer basket increases substantially, consumers tend to substitute lower-priced alternatives.

Inflation when forecasted does not harms as much as wrong prediction or forecast can create. It is these distributional effects (from lenders to borrowers) that makes Unanticipated Inflation more dangerous than the anticipated one

The real interest rate is the rate of interest an investor, saver or lender receives (or expects to receive) after allowing for inflation. It can be described more formally by the Fisher equation, which states that the real interest rate is approximately the nominal interest rate minus the inflation rate.

The real rate is the nominal rate minus inflation. In the case of a loan, it is this real interest that the lender receives as income. If the lender is receiving 8% from a loan and inflation is 8%, then the real rate of interest is zero, because nominal interest and inflation are equal.

The inflation rate is the rate at which prices for goods and services increase over a period of time. If the cost of goods and services decrease over a period of time, then it is known as deflation, which is just negative inflation. The base year for inflation is the year you want to compare the inflation rate from. For example, if you want to know the inflation rate since 1998, then the base year is 1998.

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In economics, a menu cost is the cost to a firm resulting from changing its prices. The name stems from the cost of restaurants literally printing new menus, but economists use it to refer to the costs of changing nominal prices in general.

In economics, money illusion, or price illusion, refers to the tendency of people to think of currency in nominal, rather than real, terms. In other words, the numerical/face value (nominal value) of money is mistaken for its purchasing power (real value) at a previous point in the general price level (in the past).

Definition of 'Cost Push Inflation' Definition: Cost push inflation is inflation caused by an increase in prices of inputs like labour, raw material, etc. The increased price of the factors of production leads to a decreased supply of these goods.

Cost-of-living adjustments (COLAs) are generally equal to the percentage increase in the consumer price index for urban wage earners and clerical workers (CPI-W) for a specific period.

Recall that a downward sloping aggregate demand curve means that as the price level drops, the quantity of output demanded increases. Similarly, as the price level drops, the national income increases. ... The first reason for the downward slope of the aggregate demand curve is Pigou's wealth effect.