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Definition of Inflation
A sustained increase in the general price level. The inflation rate is the percentage rate of change in the price level.
Rate at which prices as a whole are increasing.
The rate at which the general level of prices for goods and services is rising.
Also called purchasing-power risk, the risk that changes in the real return the investor will
The fact that future inflation rates are not known. It is a possible contributing factor to
A clause in a contract providing for increases or decreases in inflation based on
inflation whose initial cause is cost increases rather than excess demand. See also demand-pull inflation.
inflation whose initial cause is excess demand rather than cost increases. See also cost-push inflation.
A reduction in the rate of inflation.
Extremely high inflation.
The loss in purchasing power due to inflation eroding the real value of financial assets such as cash.
Money after-tax rate of return minus the inflation rate.
The CPI, as it is called, measures the prices of consumer goods and services and is a
A theory that nominal interest rates in two or more countries should be equal to the required real
In name only. Differences in compounding cause the nominal rate to differ from the effective
The interest rate unadjusted for inflation.
Related: inflation risk
Exchange rates that have been adjusted for the inflation differential between two countries.
Real interest rate
The rate of interest excluding the effect of inflation; that is, the rate that is earned in terms
An indexing strategy that is linked to active management through the emphasis of a
Real Interest Rate
The rate of interest paid on an investment adjusted for inflation
international Fisher effect
Theory that real interest rates in all countries should be equal, with differences in nominal rates reflecting differences in expected inflation.
purchasing power parity (PPP)
Theory that the cost of living in different countries is equal, and exchange rates adjust to offset inflation differentials across countries.
Belief that an effort to keep unemployment below its natural rate results in an accelerating inflation.
Decreasing inflation by immediately decreasing the money growth rate to a new, low rate. Contrast with gradualism.
Consumer Price Index (CPI)
An index calculated by tracking the cost of a typical bundle of consumer goods and services over time. It is commonly used to measure inflation.
A sustained decrease in the price level. The opposite of an inflation.
A policy of decreasing the rate of growth of the money supply gradually over an extended period of time, so that inflation can adjust with smaller unemployment cost. Contrast with cold-turkey policy.
A policy designed to lower inflation without reducing aggregate demand. Wage/price controls are an example.
Interest Rate, Real
Nominal interest rate less expected inflation.
Nonaccelerating inflation rate of unemployment. See natural rate of unemployment.
Natural Rate of Unemployment (NRU)
The level of unemployment characterizing the economy in long-run equilibrium, determined by the levels of frictional, structural, and institutionally induced unemployment. At this rate of unemployment, inflation should be constant, so it is sometimes called the nonaccelerating inflation rate of unemployment, or NAIRU.
Relationship between inflation and unemployment.
Purchasing Power Parity
Theory that says that over the long run exchange rate changes offset any difference between foreign and domestic inflation. This result assumes that the real exchange rate remains constant, something that is not true even in the long run.
Simultaneous existence of high inflation and high unemployment, or simultaneous existence of rising inflation and r sing unemployment.
The adjustment of benefits to compensate for the effects of inflation.
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