Chapter 6 - Chapter 6 Price level the average level of...

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Chapter 6 Price level: the average level of prices in the economy Index number - A series of number used to track a variable’s rise or fall over time - Meaningful only in a relative sense - value of measure in current periodvalue of measure in base period x 100 - An index will always equal 100 in the base period - Consumer price index (CPI) - An index of the cost, through time, of a fixed market basket of goods purchased by a typical household in some base period - The goal of CPI is to track the prices paid by consumers , and no one else - Includes two types of goods and services that goods and services that are not part of GDP 1. Household purchases of used goods 2. Household purchases of imports from other countries - CPI market basket – a collection of goods and services that the typical consumer buys - Inflation rate measures how fast the price level is changing - Time t inflation rate = - - - CPIt CPIt 1CPIt 1 - How the CPI is used 1. As a policy target
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- Price stability (low inflation rate) is one of the nation’s important macroeconomic goals 2. To index payments - A payment that is periodically adjusted to proportion with a price index 3. To translate from Nominal to Real values - Real value = Nominal value CPI x 100 -
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