Principles of Macroeconomics for AP® Courses 2e

# Key Terms

a loan a borrower uses to purchase a home in which the interest rate varies with market interest rates
base year
arbitrary year whose value as an index number economists define as 100; inflation from the base year to other years can easily be seen by comparing the index number in the other year to the index number in the base year—for example, 100; so, if the index number for a year is 105, then there has been exactly 5% inflation between that year and the base year
a hypothetical group of different items, with specified quantities of each one meant to represent a “typical” set of consumer purchases, used as a basis for calculating how the price level changes over time
Consumer Price Index (CPI)
a measure of inflation that U.S. government statisticians calculate based on the price level from a fixed basket of goods and services that represents the average consumer's purchases
core inflation index
a measure of inflation typically calculated by taking the CPI and excluding volatile economic variables such as food and energy prices to better measure the underlying and persistent trend in long-term prices
a contractual provision that wage increases will keep up with inflation
deflation
negative inflation; most prices in the economy are falling
Employment Cost Index
a measure of inflation based on wages paid in the labor market
GDP deflator
a measure of inflation based on the prices of all the GDP components
hyperinflation
an outburst of high inflation that often occurs (although not exclusively) when economies shift from a controlled economy to a market-oriented economy
index number
a unit-free number derived from the price level over a number of years, which makes computing inflation rates easier, since the index number has values around 100
indexed
a price, wage, or interest rate is adjusted automatically for inflation
inflation
a general and ongoing rise in price levels in an economy
International Price Index
a measure of inflation based on the prices of merchandise that is exported or imported
Producer Price Index (PPI)
a measure of inflation based on prices paid for supplies and inputs by producers of goods and services
quality/new goods bias
inflation calculated using a fixed basket of goods over time tends to overstate the true rise in cost of living, because it does not account for improvements in the quality of existing goods or the invention of new goods
substitution bias
an inflation rate calculated using a fixed basket of goods over time tends to overstate the true rise in the cost of living, because it does not take into account that the person can substitute away from goods whose prices rise considerably
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