Ch 11 Measuring the Cost of Living Flashcards
What is a measure of the overall cost of the goods and services bought by a typical consumer?
Consumer Price Index
What is the formula for CPI?
(Price of basket of goods and services in current year / price of basket in base year) * 100
Formula for Inflation
(CPI in year 2 - CPI in year 1) / CPI in year 1
What is a measure of the overall cost of consumer goods and services excluding food and energy?
core CPI
What is a measure of the cost of a basket of goods and services bought by firms?
Producer Price Index
What are problems in measuring the cost of living?
1) Substitution bias - fixed basket of goods; however consumer preferences change especially when price levels change
2) Introduction of New Goods - it does not reflect the increase in the value of the dollar that arises from the introduction of new goods.
3) Unmeasured Quality Change - if the quality of a good deteriorates from one year to the next while its price remains the same, the value of a dollar falls. What the Bureau attempts to do is adjust the price of the good to account for the quality change. However, quality is hard to measure.
What is the formula for turning dollar figures from year T into today’s dollars?
Amount in today’s dollars = amount in year T dollars x price level today / price level in year T
What is the formula for real interest rate?
Nominal interest rate - inflation rate
What is the largest component in the basket of goods and services used to compute the CPI.
housing
If a Pennsylvania gun manufacturer raises the price of rifles it sells to the US Army, its price hikes will increase
A. both the CPI and GDP deflator
B. neither the CPI nor the GDP deflator
C. the CPI but not the GDP deflator
D. the GDP deflator but not the CPI
D
You deposit $2,000 in a savings account, and a year later you have $2,100. Meanwhile, the CPI rises from 200 to 204. In this case, the nominal interest rate is percent, and the real interest rate is percent.
1, 5
3, 5
5, 1
5, 3
5,3
