Chapter 6 - ECON 002 Introduction to Macroeconomics Chapter...

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1 ECON 002 Introduction to Macroeconomics Chapter 6 The Price Level and Inflation ECON 002 Introduction to Macroeconomics Measuring the Price Level and Inflation • Price level • Index ECON 002 Introduction to Macroeconomics The Consumer Price Index • Index of the cost, through time, of a fixed market basket of goods purchased by a typical household in some base period • Includes household purchases of
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ECON 002 Introduction to Macroeconomics The Consumer Price Index • CPI measures the prices of all goods and services bought by U.S. households ECON 002 Introduction to Macroeconomics EXAMPLE basket: {4 pizzas, 10 lattes} $12 x 4 + $3 x 10 = $78 $11 x 4 + $2.5 x 10 = $69 $10 x 4 + $2 x 10 = $60 cost of basket $3.00 $2.50 $2.00 price of latte $12 2005 $11 2004 $10 2003 price of pizza year Compute CPI in each year: 2003: 100 x ($60/$60) = 100 2004: 100 x ($69/$60) = 115 2005: 100 x ($78/$60) = 130 Inflation rate: ECON 002 Introduction to Macroeconomics From Price Index to Inflation
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Chapter 6 - ECON 002 Introduction to Macroeconomics Chapter...

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