CPI and Inflation Flashcards
1
Q
CPI stands for
A
Consumer price index
2
Q
CPI formula
A
Price of basket of goods and services in current year / price of basket in base year x 100
3
Q
CPI is used to
A
Measure the overall levels of price in the economy
4
Q
5 steps to calculate CPI and inflation
A
- Fix the basket
- Find the prices
- Compute the baskets cost
- Choose a base year and compute the index
- Compute the inflation rate
5
Q
Inflation rate formula (CPI)
A
CPI(y2) - CPI(y1) / CPI(y1) x 100
6
Q
Real interest rate formula
A
Nominal interest rate - inflation rate
7
Q
3 problems with CPI
A
Substitution bias
Intro of new goods (purchasing power increases)
Unmeasured quality change
8
Q
GDP Deflator vs. CPI (2 differences)
A
GDP is produced domestically, CPI is bought by consumers
GDP is currently produced, CPI is fixed basket of goods
9
Q
Costs of inflation
A
Shoe leather costs associated with reduced money holdings Menu costs Increased variability of relative prices Unintended changes in tax liabilities Confusion and inconvenience Arbitrary redistribution’s of wealth
