Inflation and Economic Consequences Quiz

Inflation is the general rise in the prices of goods and services, leading to a decrease in the purchasing power of a currency.

The inflation rate is calculated by comparing the current Consumer Price Index (CPI) to the previous CPI, expressed as a percentage.

The Federal Reserve, commonly known as the Fed, is the central bank of the United States and is responsible for formulating and implementing monetary policy.

Monetary policy is a tool used by central banks to control the money supply, interest rates, and credit conditions, influencing inflation and economic activity.

Disinflation refers to a situation where the rate of inflation is decreasing, but the overall price level is still rising, albeit at a slower pace.

Gross Domestic Product (GDP) is a key economic indicator that measures the total value of all goods and services produced within a country's borders over a specific time period, reflecting the overall health of the economy.

CPI measures the average change in prices paid by consumers for a basket of goods and services, reflecting inflation's impact on household expenses.

Demand-pull inflation occurs when the overall demand for goods and services surpasses their supply, leading to a general increase in prices.

The Phillips curve proposes that there is an inverse relationship between inflation and unemployment; as one decreases, the other tends to rise.

Cost-push inflation occurs when increased production costs, such as rising wages and raw material expenses, lead to higher prices for goods and services.

The Producer Price Index (PPI) is a lagging indicator, reflecting changes in producer prices after they occur, providing insights into inflation trends.

Disinflation refers to a situation where the rate of inflation is decreasing, often approaching zero, but still positive.

Stagflation is a unique economic situation characterized by high inflation rates, coupled with slow or negative economic growth.

Hyperinflation results in an extremely rapid and typically uncontrollable increase in prices, causing a swift decline in the value of a country's currency.

The Fisher effect posits that a rise in inflation will result in a corresponding increase in nominal interest rates.

Central banks use monetary policy, including raising interest rates, to control inflation by reducing borrowing and spending in the economy.

Deflation increases the real burden of debt as the value of money rises, making it more challenging for individuals and businesses to repay loans, leading to reduced spending.

The Quantity Theory of Money posits that an increase in the money supply, assuming constant velocity, will result in a proportional increase in prices.

Tight fiscal policy involves government measures to reduce inflation by cutting spending, increasing taxes, or both, even if it leads to lower economic growth and higher unemployment.

Monetarism is an economic school of thought that attributes inflation primarily to changes in the money supply, emphasizing the importance of controlling money growth to manage inflation.