2.3 Price Indices and Inflation

• The Consumer Price Index (CPI) measures changes in prices paid by urban consumers.

  True
• Match the price index with its focus:

  CPI ↔️ Consumer prices

  PPI ↔️ Producer prices

  GDP Deflator ↔️ Overall price level
• Steps in calculating a price index

  1️⃣ Select the base year

  2️⃣ Determine the market basket

  3️⃣ Value the market basket in both years

  4️⃣ Calculate the price index
• Cost-push inflation arises from increases in production costs
• Inflation erodes the purchasing power of money


  True
• Inflation reduces the real value of money

  True
• Order the types of inflation from mildest to most severe:

  1️⃣ Creeping inflation

  2️⃣ Galloping inflation

  3️⃣ Hyperinflation
• Creeping inflation has a minimal disruptive impact on the economy


  True
• Match the price index with its purpose:

  Consumer Price Index (CPI) ↔️ Measures changes in consumer prices

  GDP Deflator ↔️ Reflects the overall price level
• Order the steps involved in calculating a price index:

  1️⃣ Select base year

  2️⃣ Determine market basket

  3️⃣ Value market basket

  4️⃣ Calculate price index
• What is cost-push inflation caused by?

  Increased production costs
• Cost-push inflation arises from increases in production costs
• What are price indices used to track in an economy?

  Changes in prices
• What does the GDP Deflator compare to reflect the overall price level?

  Nominal GDP to real GDP
• What is the key difference between CPI and GDP Deflator?

  CPI focuses on consumer prices
• What is the effect of inflation on the purchasing power of money?

  It erodes purchasing power
• Match the type of inflation with its description:

  Creeping inflation ↔️ Slow and steady price increases

  Galloping inflation ↔️ Rapid price increases

  Hyperinflation ↔️ Uncontrollable price increases
• Order the drivers of inflation based on their description:

  1️⃣ Excess demand exceeding supply (Demand-pull)

  2️⃣ Increases in production costs (Cost-push)

  3️⃣ Money supply growing faster than output (Monetary)
• What is demand-pull inflation caused by?

  Excess demand exceeding supply
• Creeping inflation typically involves price increases around 2-3%
• What is the monthly price increase rate in hyperinflation?

  Over 50%
• What does the Producer Price Index (PPI) track?

  Prices received by producers
• To calculate a price index, divide the current year cost by the base year cost and multiply by 100
• Inflation is the sustained increase in the general price level of goods and services.
• Monetary inflation occurs when the money supply grows faster than economic output.


  True
• Galloping inflation quickly erodes the purchasing power of money.


  True
• Hyperinflation occurs when prices increase by over 50% per month.


  True
• Central banks manage inflation to ensure economic stability.


  True
• Fiscal policies involve adjusting government spending and taxation
• Creeping inflation involves slow and steady price increases
• Creeping inflation typically increases prices by around 2-3%
• Demand-pull and monetary inflation are generally more disruptive
• Order the tools of monetary policy from most direct to least direct:

  1️⃣ Interest Rate Adjustments

  2️⃣ Reserve Requirements

  3️⃣ Open Market Operations
• Price indices help in tracking inflation and understanding economic stability
• The Producer Price Index (PPI) measures changes in prices received by producers
• Price indices are calculated by comparing the cost of a market basket in a current year to its cost in a base
• Demand-pull inflation is caused by excess demand exceeding available supply.

  True
• Inflation occurs when the money supply grows faster than economic output
• Match the type of inflation with its description:

  Creeping inflation ↔️ Slow and steady price increases

  Galloping inflation ↔️ Rapid price increases

  Hyperinflation ↔️ Extreme and uncontrollable price surges
• What is monetary inflation caused by?

  Money supply growing faster than output