Definition
Give a concise definition of inflation
Inflation is an increase in the general price level over time
What is the primary metric used to monitor cost-of-living changes
Consumer Price Index, CPI
Name the two main types of inflation discussed
Demand-pull and cost-push
List one trigger of demand-pull inflation
Rapid increases in household consumption, government stimulus, or export booms
What happens to real income when inflation rises faster than nominal income
Real income falls; purchasing power declines
What term describes a decrease in the general price level over time
Deflation
The CPI basket is divided into major expenditure categories. Name two largest categories mentioned
Housing and food
What phrase summarizes demand-pull inflation
"Too much money chasing too few goods.")
List one trigger of cost-push inflation
Natural disasters, rises in energy prices, import tariffs, or labor shortages.
Who tends to lose from unanticipated inflation: borrowers or lenders
Lenders lose; borrowers benefit
Explain why inflation matters for consumers’ purchasing power
When prices rise faster than wages, real income falls and consumers can buy fewer goods and services
In constructing a price index, what is the base-period index value set to
100
Describe cost-push inflation in one sentence
Cost-push inflation is rising general price level caused by increases in production costs
Explain how inflation expectations can perpetuate inflation
Workers demand higher wages to cover expected price rises; firms raise prices in anticipation, creating a feedback loop
Explain how inflation can change wealth distribution between asset owners and those on fixed incomes
Asset owners (property, shares) often see nominal asset values rise, while people on fixed nominal incomes lose purchasing power unless incomes are indexed
If average price level doubles from 2000 to 2025, what happens to the purchasing power of $100
It is halved to $50
Show the formula for the inflation rate between two periods P1 and P2
{P2 - P1}{P1} \times 100
What economic condition can result when cost-push pressures occur and output falls while prices rise
Stagflation
Define the wage-price spiral
A cycle where higher wages raise firms’ costs, leading to higher prices, which then prompt further wage demands
Why does high persistent inflation discourage long-term capital investment
It increases uncertainty and risk, leading investors to favor speculative assets instead of productive investment
Explain why individual goods may not all rise in price during an inflationary period
Inflation is a general increase in the price level; specific goods can fall in price due to supply, demand, or technological changes
Define "weight" in the context of the CPI and explain its importance
A weight reflects an item's relative importance in average consumer spending; larger weights mean price changes in that category have bigger effects on the CPI
Contrast when demand-pull vs. cost-push inflation typically occur in the business cycle
Demand-pull usually occurs in expansions with high employment; cost-push can occur at any stage and may coincide with stagnant output
What extreme monetary scenario causes hyperinflation, and what monthly inflation threshold defines it in the slides
Excessive uncontrolled expansion of the domestic money supply (e.g., continuous money printing); hyperinflation defined as monthly inflation exceeding 50%
Use the example from the slides: If nominal income is $70,000 and inflation is 5%, what is the approximate real purchasing power of that income
$66,667; because real income ≈ \frac{70,000}{1.05} = 66,666.67