AP Macroeconomics AMSCO Guided Notes
2.4: Price Indices and Inflation
AP Macroeconomics Guided Notes
AMSCO 2.4 - Price Indices and Inflation
Essential Questions
- How is the consumer price index (CPI) related to inflation, deflation, disinflation, and real variables?
I. Inflation
1. What is inflation and how does it affect the purchasing power of money?
2. Who benefits from inflation and who is harmed by it?
II. Consumer Price Index (CPI)
A. The Consumer Price Index (CPI)
1. What is the CPI and what does the market basket include?
2. How is the CPI used by the government, businesses, and individuals?
B. Calculating the CPI
1. How is the CPI calculated and why is the base year set to equal 100?
C. Calculating the Inflation Rate
1. How is the inflation rate calculated using CPI values from two different periods?
D. Real and Nominal Variables
1. What is the difference between real and nominal variables?
2. How can the CPI be used to convert nominal wages into real wages?
E. Deflation and Disinflation
1. What is deflation and what economic conditions typically cause it?
2. How does disinflation differ from deflation?
III. Inflation—Causes and Management
1. What is demand-pull inflation and how does it occur?
2. What methods can the government use to combat high inflation?
3. How can the government combat deflation?
IV. CPI Limitations
1. What are the major weaknesses of the CPI as an inflation measure?
2. How do substitution bias and changes in product quality affect the accuracy of the CPI?
Key Terms
inflation
consumer price index (CPI)
inflation rate
real variables
deflation
disinflation
demand-pull inflation