Lecture 3 stuff to work on

Question 1

What is the CPI?

Answer 1

This is a measure of the overall costs of the goods and services bought by a typical consumer

Question 2

How can we calculate the CPI?

Answer 2

the price of the basket of goods and services in the given year divided by the price of the basket in the base year, then multiplied by 1000.

Question 3

How can we calculate inflation from the CPI?

Answer 3

[(final CPI-initial CPI)/initial CPI] x 100

Question 4

What are three problems with the CPI?

Answer 4

• substitution bias
• introduction of new goods
• unmeasured quality change

Question 5

What’s the difference between CPI and the GDP deflator?

Answer 5

The GDP deflator reflects the price of all goods and services produced domestically, whereas the consumer price index reflects the prices of goods and services bought by consumers.

Question 6

How can we use the CPI to correct nominal measures important to consumers for inflation?

Answer 6

Real value (t) = 100 x [nominal value (t)/CPI(t)]

Question 7

What’s the Fisher equation and what does it mean?

Answer 7

Real interest rate (r) = nominal interest rate (i) - inflation