Chapter 21

Question 0

Inflation rate:

Answer 0

(CPI this year - CPI last year)/ CPI last year x 100

Question 1

CPI is calculated:

Answer 1

(Cost of good at current price / Cost of good at base year price) x 100.

Question 2

Bias about CPI

Answer 2

• New good bias (New products, more expensive)
• Quality Change Bias
• Commodity substitution bias (Buy another good if price goes up for the other).
• Outlet Substitution bias

Question 3

Alternative Price Indexes

Answer 3

Used to measure price level:

-GDP Deflator = (nominal GDP / Real GDP ) x 100

Question 4

Price Index Measures:
Both CPI & GDP Deflator are:
Both CPI & GDP deflator can be used to calculate:
CPI: Consumer goods
GDP Deflator: Consumer goods, investment goods, Government spending, export import

Answer 4

• Average Price level in the economy.
• Price Indexes.
• Inflation

Question 5

Core Inflation Rate:

Answer 5

Inflation rate excluding the volatile elements ( food and fuel).
The core inflation rate attempts to reveal the underlying inflation trend.

Question 6

Real variables in Macroeconomics:

Answer 6

We can use the GDP deflator to deflate nominal variables, to find their real values:
Real wage rate = (Nom. wage rate / GDP deflator) x 100.
But this is not the real interest rate.