Term
The Consumer Price Index= _ _ _ 

Definition


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


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______________ The BLS collects data on the prices of all the goods in the basket. 

Definition


Term
________________ Use the prices to compute the total cost of the basket 

Definition
Compute the basket’s cost 


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 yearCPI 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

Definition
included in CPI excluded from GDP deflator 


Term

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

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) 

