MacroeconomicsLesson 2 of 4 in the course Historical Performance of US Markets

Inflation, CPI Measurement, and Historical Price Changes

5 flashcards · 4 quiz questions · 5 match pairs · 5 fill-in sentences · English

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Summary

Inflation changes what money can buy, so investment returns and incomes are best understood in terms of their purchasing power—not just their dollar amounts. This lesson explains inflation and deflation, the difference between expected and actual inflation, and how price changes can affect borrowers, lenders, workers, and consumers.

Inflation is a sustained increase in the overall prices of goods and services. When prices rise, the same amount of money buys less than before. For example, if a haircut that once cost $10 now costs $15, $10 no longer buys the same service. The dollar amount has not changed, but its purchasing power has fallen.

All flashcards

Inflation
A sustained increase in the overall prices of goods and services, which reduces the purchasing power of money.
Real return
An investment return adjusted for inflation; approximately, the nominal return minus the inflation rate.
Consumer Price Index (CPI)
An index tracking price changes over time for a representative basket of US consumer goods and services.
CPI index value
A value on a scale used to compare price levels over time, not a dollar price.
Unexpected inflation
A difference between realized and anticipated inflation that can redistribute purchasing power between borrowers and lenders.

Quiz questions

  1. What does the US Consumer Price Index (CPI) measure?Answer: Price changes over time for a representative basket of consumer goods and services.
  2. Which category had the highest reported average annual price increase from 1980 to 2020?Answer: College tuition and fees, at 6.49%.
  3. Why do the reported average annual CPI increases of 2.90% and 2.55% differ?Answer: They describe different periods: 1980–2020 and 1984–2020.
  4. The CPI index rises from 82.4 in 1980 to 258.8 in 2020. What do these values represent?Answer: Index levels used to compare prices over time, not dollar prices.

Based on Principles of Finance by Julie Dahlquist, Rainford Knight (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.

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