chap 11

Question 1

consumer price index (CPI)

Answer 1

measure the typical consumer’s cost of living

the basis of cost of living adjustments (COLAs) in many contracts and in Social Security

Question 2

steps to calculate CPI

Answer 2

fix the basket, find the prices, compute the baskets cost, choose a base year and compute the index, compute the inflation rate

Question 3

who surveys consumers to determine what’s in the typical consumers shopping basket?

Answer 3

Bureau of Labor Statistics (BLS)

Question 4

CPI =

Answer 4

100 * (cost of basket in current year/cost of basket in base year)

Question 5

inflation rate =

Answer 5

100 * (CPI this year - CPI last year)/(CPI last year)

Question 6

what’s in the CPI basket?

Answer 6

anything that people need to survive: housing, transportation, food and beverages, etc

Question 7

substitution bias (CPI problem)

Answer 7

some price rise faster than others, consumers shift to use relatively cheaper goods, CPI is fixed so it doesn’t catch this.

Question 8

introduction of new goods (CPI problem)

Answer 8

new goods increase variety so consumers have more to pick from, dollar become more valuable

Question 9

unmeasured quality change (CPI problem)

Answer 9

improvement in quality of goods (therefore price?) increases value of the dollar, but quality is hard to measure so the BLS doesn’t really effectively count this

Question 10

problems in the CPI overstate or understae cost of living increases

Answer 10

overstate

Question 11

imported consumer goods CPI/GDP?

Answer 11

yes CPI

no GDP

Question 12

capital goods CPI/GDP?

Answer 12

no CPI

yes GDP (if domestically produced)

Question 13

baskets in CPI and GDP

Answer 13

CPI: fixed basket

GDP: uses basket of currently produced g&s

Question 14

comparing dollar figures from different times (equation)

Answer 14

amount in today’s dollars = (amount in old dollars) * (CPI today)/(CPI then)

Question 15

indexation

Answer 15

a dollar amount is indexed for inflation if it is automatically corrected for inflation by law or in a contract

ex: COLAs and Social Security payments

Question 16

real interest rates

Answer 16

corrected for inflation, the rate of growth in the purchasing power of a deposit or debt

Question 17

the nominal interest rate

Answer 17

not corrected for inflation, the rate of growth in the dollar value of a deposit or debt

Question 18

real interest rate = (equation)

Answer 18

(nominal interest rate) - (inflation rate)