ch 11

To calculate the CPI, we must follow these five steps: 1. Fix the "___." 2. Find the ____ 3. Compute the basket's ___. 4. Choose a ___and compute the CPI. 5. Compute the ___

1. basket 2. prices 3.cost (cost of CPI basket) 4. base year 5. inflation rate.

What agency provides the statistics on CPI?

Bureau of Labor Statistics, U.S. Dept. of Labor

The ____ is a measure of the cost of living. It tracks the cost of the typical consumer's "basket" of goods & services.

Consumer Price Index

The CPI is used to make ____and to correct economic variables for the effects of inflation.

Cost of Living Adjustments

Problems With the CPI: 1.____ 2. Introduction of ___ 3. Unmeasured ___

Problems With the CPI: 1. Substitution Bias 2. Introduction of New Goods 3. Unmeasured Quality Change

In each scenario, determine the effects on the CPI and the GDP deflator. A. Starbucks raises the price of Cappuccinos.

The CPI and GDP deflator both rise.

In each scenario, determine the effects on the CPI and the GDP deflator. C. Armani raises the price of the Italian jeans it sells in the U.S.

The CPI rises, the GDP deflator does not.

measures the typical consumer's cost of living.

The Consumer Price Index (CPI)

In each scenario, determine the effects on the CPI and the GDP deflator. B. Caterpillar raises the price of the industrial tractors it manufactures at its Illinois factory.

The GDP deflator rises, the CPI does not.

Researchers, business analysts, and policymakers often use this technique (Correcting Variables for Inflation: Comparing Dollar Figures from Different Times) to ____ a time series of current-dollar (nominal) figures into constant-dollar (real) figures. They can then see how a variable has changed over time ____ correcting for inflation.

convert after

The real interest rate: the interest rate is ____ for inflation

corrected

The CPI in any year equals: 100x (cost of CPI basket in ___ year/cost of CPI basket in __ year)

current base

Contrasting the CPI and GDP Deflator: Capital goods: (included or excluded) ___ from CPI ____ in GDP deflator (if produced domestically)

excluded included

Contrasting the CPI and GDP Deflator: The basket: CPI uses ___ basket GDP deflator uses basket of ___ produced goods & services This matters if different prices are changing by different amounts.

fixed currently

Contrasting the CPI and GDP Deflator: Imported consumer goods: (included or excluded) ___ in CPI ____ from GDP deflator

included excluded

Each of these problems causes the CPI to overstate cost of living _____.

increases

A dollar amount is ___ for inflation if it is automatically corrected for inflation by law or in a contract.

indexed

Real interest rate = ___ interest rate - ____ rate

nominal inflation

The nominal interest rate: the interest rate is ____ for inflation

not corrected

The_____ is corrected for inflation and is computed by subtracting the inflation rate from the nominal interest rate.

real interest rate

Compute the inflation rate: (The percentage change in the CPI from the preceding period. ) inflation rate= (CPI __ year - CPI ___ year/ CPI ____ year) x100

this - last / last

The CPI reflects spending patterns of two population groups:

urban consumers and clerical workers