CHAPTER 23MEASURING THE COST OF LIVING525◆Various laws and private contracts use price indexes tocorrect for the effects of inflation. The tax laws, however,are only partially indexed for inflation.◆A correction for inflation is especially important whenlooking at data on interest rates. The nominal interestrate is the interest rate usually reported; it is the rate atwhich the number of dollars in a savings accountincreases over time. By contrast, the real interest ratetakes into account changes in the value of the dollarover time. The real interest rate equals the nominalinterest rate minus the rate of inflation.consumer price index (CPI), p. 512inflation rate, p. 514producer price index, p. 515indexation, p. 521nominal interest rate, p. 523real interest rate, p. 5231.Which do you think has a greater effect on the consumerprice index: a 10 percent increase in the price of chickenor a 10 percent increase in the price of caviar? Why?
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