CH 6

Question 1

Price Level & Inflation

Answer 1

Average level of prices in the Economy

Inflation: The rate at which the price level increases over time.

Question 2

What is CPI?
What is included in CPI?
How do you calculate CPI?

Answer 2

Consumer Price Index– Index of the cost, through time, of a fixed market basket of goods purchased by a typical household in some base period

New goods (part of GDP)
Used goods (Not part of GDP)
Imports (Not part of GDP)

Cost of Market Basket at Current Period/ x100=CPI
Cost of Market Basket in Base Period

Question 3

Index

Answer 3

As the price level changes, we use index —numbers to compare prices.

Value of measure in current period/ x100=
Value of Measure in the Base Period

Question 4

How is CPI reported & How is it Used

Answer 4

CPI is reported monthly by the Bureau of Labor Statistics of the Department of Labor.

It is used as:

1) A policy target– it aids in tracking inflation and helps to control it.
2) To index payments
3) To translate from Nominal to Real Values

Question 5

How do you calculate inflation rate?

Answer 5

(CPI of Current Year- CPI of Previous Year)/

CPI of Previous Year x100=

Question 6

What is the GDP Price Index?

Answer 6

Index of the price level for all final goods and services included in GDP. Used to calculate real GDP

Real GDP= (Nominal GDP/GDP Price Index) x100

Question 7

Changing from Nominal to Real VALUES?

Answer 7

Real Value= Nominal Value/Price Index x100

EX: Real Wage= Nominal Wage/CPI x100
All in the same year.

Question 8

GDP Price Index vs. CPI? What’s the difference?

Answer 8

They include and exclude different things.

GDP includes all things included in GDP (C,G,I,NX)

CPI includes only consumer purchases, as well as used goods and imports.

Question 9

Changing from Real to Nominal RATES?

Answer 9

% Change in Real=

%Change Nominal -% Change in Price Level