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Chapter 20: Problem 5

The following appeared in a news article: "Inflation in the Lehigh Valley during the first quarter of ... [the year] was less than half the national rate.... So, unlike much of the nation, the fear here is deflation \(-\) when prices sink so low the CPI drops below zero." Do you agree with the reporter's definition of deflation? Briefly explain.

Short Answer

Expert verified
The reporter's definition of deflation is not completely accurate. Deflation is the decrease in the general level of prices, but it does not necessarily mean the CPI must fall below zero. The reporter is mixing up deflation with negative inflation.

Step by step solution

01

Understand the Definition of Deflation

Deflation is when the general level of prices is falling. This is usually associated with a low or negative inflation rate.
02

Analyze the Reporter's Definition

The reporter says deflation happens when prices sink so low the CPI drops below zero. The CPI dropping below zero, however, is not exactly deflation but rather negative inflation. Deflation is the decrease in the general level of prices, but it does not necessarily mean the index must fall below zero.
03

Conclude

The reporter's definition is not completely accurate. While deflation does involve falling prices, this does not mean that the CPI has to drop below zero. The CPI can decrease while still being above zero, which would be deflation. The misunderstanding is between deflation and negative inflation.

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Most popular questions from this chapter

What advice for finding a job would you give someone who is frictionally unemployed? What advice would you give someone who is structurally unemployed? What advice would you give someone who is cyclically unemployed?

Suppose you were borrowing money to buy a car. a. Which of these situations would you prefer: The interest rate on your car loan is 20 percent and the inflation rate is 19 percent, or the interest rate on your car loan is 5 percent and the inflation rate is 2 percent? Briefly explain. b. Now suppose you are a manager at JPMorgan Chase, and you are making car loans. Which situation in part (a) would you now prefer? Briefly explain.

The headline on an article in the Wall Street Journal was "Why Ice Cream Is More Important Than Bacon When Tracking Inflation." Considering how the CPI is constructed, why would ice cream be more important than bacon in calculating inflation?

(Related to the Don't Let This Happen to You on page 681 ) An article in the Wall Street Journal asked "How can inflation be low when everything is so expensive?" The article also noted that "the CPI shows that prices are the highest they've ever been." Is there a contradiction between a low inflation rate as measured by the CPI and the observations that prices are "the highest they've ever been" and everything is "so expensive"? Briefly explain.

An article in the Wall Street Journal contained the following observation: "Every month, millions of workers leave the job market because of retirement, to care for children or aging parents, to pursue more education, or out of discouragement. Millions of others jump in after graduating." a. Are the millions of workers leaving the job market for the reasons given counted as unemployed in the BLS data? Briefly explain. b. Will the BLS count people entering the job market after graduating from high school or college as part of the labor force even if they don't find a job right away? Briefly explain.
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