Price-Level Changes

Review section 2 of the Macroeconomics chapter assigned in Unit 2.1, which defines and discusses the concept of Inflation. Learn what hyperinflation and deflation are and identify the method of calculating inflation. Pay attention to the meaning and calculation of the term "Price Index" and the way it is used to calculate inflation.

KEY TAKEAWAYS

  • Inflation is an increase in the average level of prices, and deflation is a decrease in the average level of prices. The rate of inflation or deflation is the percentage rate of change in a price index.
  • The consumer price index (CPI) is the most widely used price index in the United States.
  • Nominal values can be converted to real values by dividing by a price index.
  • Inflation and deflation affect the real value of money, of future obligations measured in money, and of fixed incomes. Unanticipated inflation and deflation create uncertainty about the future.
  • Economists generally agree that the CPI and other price indexes that employ fixed market baskets of goods and services do not accurately measure price-level changes. Biases include the substitution bias, the new-product bias, the quality-change bias, and the outlet bias.