Eco (Macro) Flashcards
Final Exam (34 cards)
Mutual funds
Sell shares to the public and use the proceeds to buy portfolios of stocks and bonds
Advantages
Allow people with small amounts of money to diversify their holdings (less risk) and give ordinary people access to the skills of professional money managers
What is the Consumer Price Index (CPI)?
A measure of the overall cost of goods and services bought by a typical consumer.
What does the CPI monitor?
Changes in the cost of living over time.
What is the Core CPI?
A measure of the overall cost of consumer goods and services excluding food and energy.
What is the Producer Price Index (PPI)?
A measure of the cost of a basket of goods and services bought by firms.
How is the CPI calculated in terms of fixing the basket?
The Bureau of Labor Statistics surveys consumers to determine what’s in the typical consumer’s ‘shopping basket.’
What is the formula to compute CPI?
CPI = [Basket’s cost in current year / Basket’s cost in base year] × 100.
How can we compute the inflation rate using CPI?
Percentage change in the CPI from the preceding period.
What is substitution bias in the context of CPI?
CPI misses substitution because it uses a fixed basket of goods, thus overstating increases in the cost of living.
How does the introduction of new goods affect the CPI?
It increases variety and allows consumers to find products that meet their needs, but CPI misses this and overstates cost of living increases.
What is unmeasured quality change in the context of CPI?
Improvements in quality increase the value of each dollar, but CPI likely misses this effect, overstating cost of living increases.
Why is it important to compare dollar figures from different times?
Inflation makes it harder to compare dollar amounts from different times.
How do you calculate the amount in today’s dollars from past earnings?
Amount in today’s dollars = Past amount × (CPI in current year / CPI in past year).
What is indexation?
A dollar amount is indexed for inflation if it is automatically corrected for inflation by law or in a contract.
What is the nominal interest rate?
Interest rate not corrected for inflation.
What is the real interest rate?
Interest rate corrected for inflation.
How is the real interest rate calculated?
Real interest rate = (nominal interest rate) – (inflation rate).
What does the CPI show?
The cost of a basket of goods and services relative to the cost of the same basket in the base year.
What does the percentage change in CPI measure?
The inflation rate.
What is one major problem with CPI regarding substitution?
It does not account for consumers’ ability to substitute toward cheaper goods over time.
Why is correcting for inflation important when looking at interest rates?
It distinguishes between the nominal interest rate and the real interest rate.
How are tax laws related to inflation?
They are only partially indexed for inflation.
What does S = Y – C - G represent?
National Savings
