Chapter 11

Question 1

how inflation is measured

Answer 1

Inflation is the increasing general level of prices. not for a single good* GENERAL level of priceS. is measured by CPI (consumer price index) which measures a sample of prices and the movement of prices

Question 2

consumer price index (CPI

Answer 2

My answer: which measures a sample of prices and the movement of prices
Book answer:
measure of the overall cost of the goods and services bought by a typical consumer. Each month, the Bureau of Labor Statistics (BLS), which is part of the Department of Labor, computes and reports the consumer price index. this is not just domestic products and ALL goods and services BOUGHT by consumers. Gas can affect this greatly and show different values than GDP deflator

Question 3

CPI formula

Answer 3

consumer price index= (Price of goods and services in CURRENT YEAR/ price of basket in base year) *100

Question 4

Inflation rate in year 2 formula

Answer 4

(CPI in year 2 - CPI in year 1/ CPI in year 1) * 100

Question 5

BLS

Answer 5

Buereau of Labor Statistics

Question 6

What does BLS decide to include in basket?

Answer 6

They include all goods and services that the typical consumer buys. And tries to “weight” these goods/services according to how much we buy of each item. they announce it monthly through paper or tv

Question 7

PPI

Answer 7

Producer price index. measures the cost of a basket of goods/services bought by FIRMS not customers. firms enventually pass on their costs to consumers through higher prices and this will be useful in predicting changes in the consumer price index (CPI)

Question 8

Why is CPI not a perfect measure of the cost of living?

Answer 8

Could be off as much as 1%

1. substitution bias- prices change form one year to the next, they don’t change proportionally. they substituted the cheaper product (this substitute may not be in basket)
2. New goods are introduced and consumers have more choices increasing the value of the dollar
3. Unmeasured quality change. If a car gets improved in a product then the value of the dollar changes. T

Question 9

GDP Deflator

Answer 9

The ratio of nominal GDP and real GDP (base price ) This only reflects the prices of goods and services PRODUCED DOMESTICALLY.

Question 10

How to convert past prices into today’s prices?

Answer 10

Past salary price* (today’s price LEVEL / Past price level)

Question 11

Indexed for inflation

Answer 11

tax system is not indexed for inflation. Indexing is used to correct for the effects of inflation when comparing dollar figures from different times. IT IS WHEN SOME AMOUNT OF MONEY IS AUTO CORRECTED FOR CHANGES IN PRICE LEVEL BY LAW Or CONTRACT. various laws and private contracts use this

Question 12

Nominal Interest rate

Answer 12

interest rate that measures the change in DOLLAR AMMOUNTS.

formula: Real interest rate= Nominal interest rate-Inflation rate

Question 13

Real Interest Rate

Answer 13

the interest rate corrected for inflation (index?)
takes into account changes in VALUE of the dollar over time
Real interest rate= Nominal interest rate-Inflation rate

Question 14

Dollar figures form different times

Answer 14

do not represent a valid comparison of purchasing power. the older figure should be inflated using a price index to compare the dollar figure

Question 15

correction for inflation

Answer 15

important when looking at data on interest rates. nominal interest rate is the interest rate usually reported.

Question 16

what customers spend their money on

Answer 16

41% housing
17% transportation
15% food and bevs
7% Education and communication
7% medical care 
6% recreation
4% Apparel 
3% other

Question 17

represents economists’ beliefs about the bias in the CPI as a measure of the cost of living?

Answer 17

There is still debate among economists on the severity of the CPI bias and what to do about it.

Question 18

quality of a good deteriorates while its price remains the same, then the value of a dollar

Answer 18

falls and the cost of living increases.

Question 19

primary purpose of measuring the overall level of prices in the economy is to

Answer 19

allow for the comparison of dollar figures from different points in time.

Question 20

Dollar Value of Savings

Answer 20

add real interest rate and inflation rate

Question 21

real interest rate

Answer 21

purchasing power?

Question 22

why price indexes such as the CSPI might overstate inflation in the cost of living

Answer 22

cost of a product goes up, then fewer buy
A new model of a good is introduced causing people to buy something else
The increase in popularity of a good

Question 23

What product/events influences GDP deflator and CPI?

Answer 23

to make a difference in GDP, it could be any product that will show up in the GDP deflator because the deflator reflects the prices of all domestically produced products.

To influence CPI, it will it reflects the prices of products purchased by typical U.S. consumers.

Question 24

purchasing power

Answer 24

initial deposit / price

Question 25

percent change in purchasing power

Answer 25

{(new dollar amount - original dollar amount)/ original dollar amount } *100