Lecture 4

Question 1

CPI

Answer 1

Consumer Price Index= Market basket at the current period/ Market basket at the base period *100
Pertains to average person with relevant goods and services; Monthly basis; Bureau of Labor Statistic is the agency

Question 2

PCE

Answer 2

Personal Consumption Expenditure Price Index
Published 2-3 weeks after CPI; More complicated calculation than CPI; Bureau of Economic Analysis is the agency (same agency as GDP data)

Question 3

Year-On-Year Inflation Rate

Answer 3

New year-old year/ old year

Question 4

Drawbacks of CPI

Answer 4

Substitution Bias (Slutsky compensation)
You would not buy the same amount of a good if the price goes up and CPI does not take that into account, therefore overestimating the CPI

Question 5

Why do we use Year-on-year method more than quarterly/monthly method?

Answer 5

The quarterly/monthly method causes the inflation rate to be distorted since it is calculating a much smaller period of time. Year-on-year method cleans for the seasonal variations.