Unformatted text preview: 2. What is the Consumer Price Index (CPI) and how is it determined each month? How does the Bureau of Labor Statistics (BLS) calculate the rate of inflation from one year to the next? What effect does inflation have on the purchasing power of a dollar? How does it explain differences between nominal and real interest rates? How does deflation differ from inflation? a. The CPI is calculated by taking a market basket or sampling of goods that are typically being purchased by consumers. Prices for goods in the market basket are collected each month, weighted by the importance of the good in the basket. Different products cost much more than other products, but typically the larger purchases are not conducted as frequently. These large price differences are compensated for and averaged in order to form an accurate price level. Page 1 ECON 2020—Macroeconomics Page 2 ECON 2020—Macroeconomics Page 3...
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- Spring '11