Chapter 7 - The CPI and Cost of Living

Question 1

CPI

Answer 1

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

Question 2

Calculating the CPI

Answer 2

CPI = Cost of CPI basket at current period prices / Cost of CPI basket at base period prices X 100

Question 3

Inflation rate

Answer 3

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

(CPI in current year - CPI in previous year) / CPI in previous year X 100

Question 4

Deflation

Answer 4

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

Question 5

Sources of Bias in the CPI

Answer 5

1) New goods bias
2) Quality change bias
3) Commodity substitution bias
4) Outlet substitution bias

Question 6

Two consequences of CPI bias

Answer 6

1) Distortion of private contracts

2) Decrease in government outlays and decrease in taxes

Question 7

Alternative measures of the price level and inflation rate

Answer 7

1) GDP price index
2) Personal consumption expenditure
3) PCE prie index excluding food and energy

Question 8

GDP Price index

Answer 8

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

Question 9

Personal Consumption Expenditure PCE

Answer 9

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 the base-year prices.

Question 10

PCE Price Index excluding food and energy

Answer 10

food and energy prices fluctuate much more than other prices. By excluding these highly variable items, the underlying price level and inflation trends can be seen more clearly.

Question 11

Core inflation rate

Answer 11

The annual percentage change in the PCE price index excluding the price of food and energy

Question 12

Dollars and cents at different dates

Answer 12

Price of stamp in 1911 = price of stamp in 1911 X CPI in 2011/CPI in 1911

Question 13

Nominal wage rate

Answer 13

the average hourly wage rate measure in current dollars

Question 14

Real wage rate

Answer 14

the average hourly wage rate measure in the dollars of a given reference year

Real wage rate = Nominal wage rate in 2011/CPI in 2011 X 100

Question 15

Nominal wage rate

Answer 15

dollar amount of interest expressed as a percentage of the amount loaned. 1000 dollars in an account, you get 50 dollars interest at the end of year therefore 5 percent interest

Question 16

Real Interest rate

Answer 16

Real interest rate = nominal interest rate - inflation rate