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Principles of Economics- Mankiw (5th) 509

Principles of Economics- Mankiw (5th) 509 - CHAPTER 23...

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CHAPTER 23 MEASURING THE COST OF LIVING 525 Various laws and private contracts use price indexes to correct for the effects of inflation. The tax laws, however, are only partially indexed for inflation. A correction for inflation is especially important when looking at data on interest rates. The nominal interest rate is the interest rate usually reported; it is the rate at which the number of dollars in a savings account increases over time. By contrast, the real interest rate takes into account changes in the value of the dollar over time. The real interest rate equals the nominal interest rate minus the rate of inflation. consumer price index (CPI), p. 512 inflation rate, p. 514 producer price index, p. 515 indexation, p. 521 nominal interest rate, p. 523 real interest rate, p. 523 1. Which do you think has a greater effect on the consumer price index: a 10 percent increase in the price of chicken or a 10 percent increase in the price of caviar? Why?
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