Inflation & CPI Flashcards
Module 7
What is inflation?
Over time, cost of living rises
Price level
measure of avg. price of goods in a economy
Inflation Rate
The rise in price level from one year to the next
What is a market basket
Things the BLS thinks consumers might consume in a month and track the avg.
What does CPI measure
price level, NOT inflation
What is CPI? what is it measured in?
An index, thus is measured in points, nothing else
What are some of the bias’s in relation to CPI (aka some of the reasons it isn’t perfectly accurate)
- Outlet Bias 2. Substitution Bias
- New product Bias 4. Increase in quality
Some ways that inflation is harmful even if nominal wages adjust
- Reduce value of wealth in dollar
- Menu costs rises
- Uncertainty in future price lvl.
The BLS market basket is..
Static
The individual market basket is
Dynamic
Describe substitution Bias
Changing amount of things from original basket to “roll with punches” from inflation while STILL getting the same amount of utility (happiness).
if there is a CPI (enter any year) = X (like 100) what is it telling you?
The base year
What is the fisher equation?
Real int. rate + inflation rate = nominal int. rate
