# Shared Flashcard Set

## Details

Economics- Ch 24
n.a
17
Economics
Not Applicable
12/18/2011

Term
 The Consumer Price Index= _ _ _
Definition
 (CPI)
Term
 what does the consumer price index (CPI) do?
Definition
 measures the typical consumer’s cost of living
Term
 How the CPI Is Calculated?
Definition
 1.Fix the “basket.” 2.Find the prices. 3.Compute the basket’s cost. 4.Choose a base year and compute the index. 5.Compute the inflation rate.
Term
 _______________ The Bureau of Labor Statistics (BLS) surveys consumers to determine what’s in the typical consumer’s “shopping basket.”
Definition
Term
 ______________ The BLS collects data on the prices of all the goods in the basket.
Definition
 Find the prices.
Term
 ________________ Use the prices to compute the total cost of the basket
Definition
Term
 __________________ The CPI in any year equals 100x(cost of basket in current year)/(cost of basket in base year)
Definition
 Choose a base year and compute the index.
Term
 __________________ The percentage change in the CPI from the preceding period. (CPI this year-CPI last year)/(CPI last year)x100%
Definition
 Compute the inflation rate.
Term
 Problems with the CPI: Substitution Bias
Definition
 -Over time, some prices rise faster than others. -Consumers substitute toward goods that become relatively cheaper, mitigating the effects of price increases. -The CPI misses this substitution because it uses a fixed basket of goods. -Thus, the CPI overstates increases in the cost of living.
Term
 Problems with the CPI: Introduction of New Goods
Definition
 -The introduction of new goods increases variety, allows consumers to find products that more closely meet their needs. -In effect, dollars become more valuable. -The CPI misses this effect because it uses a fixed basket of goods. -Thus, the CPI overstates increases in the cost of living.
Term
 Problems with the CPI: Unmeasured Quality Change
Definition
 -Improvements in the quality of goods in the basket increase the value of each dollar. -The BLS tries to account for quality changes but probably misses some, as quality is hard to measure. -Thus, the CPI overstates increases in the cost of living.
Term
 Imported consumer goods:
Definition
 -included in CPI -excluded from GDP deflator
Term
 Capital goods:
Definition
 -excluded from CPI -included in GDP deflator (if produced domestically)
Term
Definition
 -CPI uses fixed basket -GDP deflator uses basket of currently produced goods & services
Term
 The nominal interest rate:
Definition
 -the interest rate not corrected for inflation -the rate of growth in the dollar value of a deposit or debt
Term
 The real interest rate:
Definition
 -corrected for inflation -the rate of growth in the purchasing power of a deposit or debt
Term
 Correcting Variables for Inflation: Real vs. Nominal Interest Rates
Definition
 Real interest rate = (nominal interest rate) – (inflation rate)
Supporting users have an ad free experience!