All Flashcards
Analyze the historical US inflation rate graph.
Recessions usually bring lower inflation, except during stagflation (e.g., 1970s oil crises).
What is the impact of increasing the money supply on inflation?
Increasing the money supply can lead to higher inflation if aggregate demand increases.
What is the impact of contractionary fiscal policy on inflation?
Contractionary fiscal policy (e.g., higher taxes) can reduce inflationary pressures.
How can interest rate hikes combat inflation?
Interest rate hikes reduce borrowing and spending, curbing aggregate demand and inflation.
What is the effect of wage controls on inflation?
Wage controls can temporarily suppress inflation, but may distort labor markets.
How does reducing government spending affect inflation?
Reducing government spending decreases aggregate demand, potentially lowering inflation.
What is the impact of supply-side policies on inflation?
Supply-side policies can increase aggregate supply, easing inflationary pressures.
How does quantitative easing affect inflation?
Quantitative easing can increase inflation if it leads to excessive money supply growth.
What is the role of fiscal policy in managing deflation?
Fiscal policy (e.g., increased spending) can stimulate demand and combat deflation.
How does exchange rate policy affect inflation?
A stronger currency can reduce import prices, lowering inflation.
What is the impact of price ceilings on inflation?
Price ceilings can lead to shortages and black markets, exacerbating inflationary pressures.
How does inflation affect purchasing power?
Inflation reduces purchasing power as each unit of currency buys fewer goods/services.
How is CPI used to adjust wages?
CPI is used to adjust wages to maintain real purchasing power amidst inflation.
How does substitution bias affect CPI accuracy?
Substitution bias overstates inflation because consumers switch to cheaper goods.
How do central banks use inflation targets?
Central banks use inflation targets to maintain economic stability.
What is the impact of deflation on borrowing?
Deflation increases the real burden of debt, discouraging borrowing and investment.
How does unanticipated inflation affect lenders?
Unanticipated inflation hurts lenders because the money repaid is worth less.
How does CPI help in international comparisons?
CPI helps compare inflation rates between countries, aiding economic analysis.
How does inflation impact savings?
Inflation erodes the real value of savings if interest rates don't keep pace.
How does disinflation affect business investment?
Disinflation can create uncertainty, potentially delaying business investment decisions.
How does CPI influence social security payments?
CPI is used to adjust Social Security benefits to maintain retirees' living standards.