Chapter 23 Flashcards

1
Q

Consumer Price Index (CPI)

A

a measure of the average of the prices paid by urban consumers for a fixed market basket of consumption goods and services.

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2
Q

When calculating the CPI, we have an established

A

reference base period of average prices and an established market basket.

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3
Q

The reference base period of CPI

A

some year in which we have set the CPI to 100 to serve as a benchmark and allows us to understand changes to CPI.

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4
Q

3 Steps to calculate CPI

A

Find the cost of the CPI market basket at base period prices; Find the cost of the CPI market basket at current period prices; Calculate the CPI for the base period and the current period.

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5
Q

Formula for calculating CPI

A

(Cost of CPI basket at current period prices)/(Cost of CPI basket at base period prices)X100

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6
Q

Inflation Rate

A

the percentage change in the price level from one year to the next

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7
Q

Inflation rate formula

A

(CPI in current year - CPI in previous year)/(CPI in previous year)X100

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8
Q

Deflation

A

a situation in which the price level is falling and the inflation rate is negative.

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9
Q

Potential sources of CPI bias include

A

New Good Bias; Quality Change Bias; Commodity Substitution Bias; Outlet Substitution Bias

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10
Q

New Good Bias

A

iPod vs. Discman

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11
Q

Quality Change Bias

A

2017 Ford Focus vs. 1991 Ford Focus

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12
Q

Commodity Substitution Bias

A

Substitute from higher priced carrots to lower priced broccoli

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13
Q

Outlet Substitution Bias

A

Buying goods online for less

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14
Q

Alternative Measures of the Price Level and Inflation Rate

A

GDP price index (the GDP Deflator)
Personal consumption expenditures (PCE) price index
PCE price index excluding food and energy

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15
Q

The GDP Price Index

A

an average of the current prices of all the goods and services included in GDP expressed as a percentage of base-year prices.

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16
Q

The GDP price index uses

A

the prices of all the goods and services in GDP

17
Q

All the goods and services in GDP

A

consumption goods and services, capital goods, government goods and services, and export goods and services

18
Q

The CPI uses

A

prices of consumption goods and services only.

19
Q

The GDP price index weights

A

each item using information about current quantities.

20
Q

The CPI weights

A

each item using information from a past Consumer Expenditure Survey.

21
Q

The Personal Consumption Expenditures (PCE) Price Index

A

is an average of the current prices of the goods and services included in the consumption expenditure component of GDP expressed as a percentage of base-year prices.

22
Q

The (PCE) Price Index Excluding Food and Energy

A

is known as the Core Inflation Rate which reflects the annual percentage change in the PCF price index excluding the prices of food and energy.

23
Q

When we talk about Nominal and Real Values, we are effectively indicating ____

A

if we have adjusted for inflation or not.

24
Q

Nominal values

A

have not adjusted for inflation and will strictly look at the change between periods.

25
Real values
adjust for inflation and will factor that in when comparing different periods.
26
The nominal wage rate
is the average hourly wage rate measured in current dollars.
27
The real wage rate
is the average hourly wage rate measured in the dollars of a given reference base year.
28
Real wage rate formula
(Nominal wage rate in current year)/Current year CPI)X100
29
Nominal Interest Rate
is the dollar amount of interest expressed as a percentage of the amount loaned.
30
Real interest rate
is the goods and services forgone in interest expressed as a percentage of the amount loaned and calculated as the nominal interest rate minus the inflation rate.
31
Real interest rate
Nominal Interest Rate - Inflation Rate