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35 Cards in this Set
- Front
- Back
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What is the CPI used to MONITOR?
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changes in cost of living over time
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If the CPI rises, what happens to the typical family?
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they need to spend more money to maintain the same standard of living.
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Steps to calculating CPI?
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1. Fix the Basket
2. Find the Prices 3. Compute Basket Price 4. Choose a base year and compute index |
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What is "Fixing the Basket"?
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Determining what prices are most important.
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How is "Fixing the Basket" accomplished?
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Monthly surveys by the BLS to determine what goods/services should be put in the basket.
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What is "Finding the Prices"?
(CPI step #2) |
Finding prices of each good in the basket at each point in time
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What is "Computing the Basket's Cost"?
(CPI Step #3) |
Using data on prices to calculate the cost of the basket of goods at different times.
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What is "Choose a Base Year and Compute the Index"?
(CPI Step #4) |
Pick a base year then do the calculation:
CPI = (Price of basket for current year) / Price of basket in base year) times 100 |
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How do you calculate inflation rate?
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(CPI in year B - CPI in year A) divided by (CPI in year A)
times 100 |
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What percent of CPI basket is Housing?
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42%
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What percent of CPI basket is Transportation?
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17%
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What percent of CPI basket is Food and Beverages?
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15%
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What is the biggest percentage of the CPI's basket?
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Housing
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What are some problems with CPI?
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-Substitution Bias
-New goods being introduced -Unmeasured quality changes |
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What is Substitution Bias?
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Consumers substitute toward goods that have become less expensive, and avoid the more expensive ones.
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Due to Substitution Bias, does the CPI overstate or understate increases in cost of living?
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overstates
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How does the Introduction of New Goods affect the quality of the CPI?
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New products mean higher variety, so each dollar is more valuable. So, fewer dollars are needed to maintain standard of living
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About how much does the CPI overstate inflation every year?
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1 percent
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What is the Producer Price Index
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A measure of the cost of a basket of goods bought by FIRMS, not consumers.
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What are the important differences between GDP Deflator and the CPI Index?
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The GDP Deflator reflects prices of goods produced domestically
The CPI reflects prices of all goods bought by customers. |
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What is Indexation?
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The automatic correction by law or contract of a dollar amount for the effects of inflation
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Example of Indexation?
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Social security benefits
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Indexation equation?
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(amount in Year A) ( Price level today/price level in Year A) = Amount in today's dollars
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What is Nominal Interest Rate?
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The interest rate NOT corrected for inflation
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What kind of interest rate does a bank pay:
Nominal or Real |
Nominal (doesn't include inflation adjustment)
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What is Real Interest Rate?
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Nominal Interest Rate corrected for effects of inflation
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What are the important differences between GDP Deflator and the CPI Index?
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The GDP Deflator reflects prices of goods produced domestically
The CPI reflects prices of all goods bought by customers. |
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Equation for Real Interest Rate?
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Nominal Interest Rate minus Inflation
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What is Indexation?
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The automatic correction by law or contract of a dollar amount for the effects of inflation
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Example of Indexation?
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Social security benefits
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Indexation equation?
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(amount in Year A) ( Price level today/price level in Year A) = Amount in today's dollars
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What is Nominal Interest Rate?
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The interest rate NOT corrected for inflation
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What kind of interest rate does a bank pay:
Nominal or Real |
Nominal (doesn't include inflation adjustment)
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What is Real Interest Rate?
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Nominal Interest Rate corrected for effects of inflation
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Equation for Real Interest Rate?
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Nominal Interest Rate minus Inflation
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