Exam2 - Flashcards - The flashcards are formatted for...

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Consumer Price Index (CPI) Consumer Price Index (CPI)
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Measure a typical consumer’s cost of living. The basis of cost of living adjustments (COLAs) in many contracts and Social Security.
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Find the Prices Fix the “Basket”
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The Bureau of Labor Statistics (BLS) surveys consumers to determine what’s in the typical consumer’s “shopping basket.” The Bureau of Labor Statistics (BLS) collects data on the prices of all the goods in the basket.
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1. Fix the “basket” 2. Find the prices 3. Compute the basket’s cost 4. Choose the base year and compute the index 5. Compute the inflation rate Compute the Basket’s Cost
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Use the prices to compute the total cost of the basket. How the CPI is calculated:
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Basket Cost Current YrBasket Cost Base Yr × 100 5-10 Years; Month
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When calculating the CPI, the basket is computed every ____, while the prices are computed every ____. The CPI in any year equals:
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- CPI this yr CPI last yrCPI last × % year 100 Inflation Rate
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Percentage change in the CPI from the preceding period. Inflation Rate:
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Relatively Cheaper Substitution Bias
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Over time, some prices rise faster than others. Consumers substitute towards goods that become ____ (substitution bias).
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1. Substitution Bias 2. Introduction of New Goods 3. Unmeasured Quality Change Fixed Basket of Goods
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CPI misses substitution bias because it uses ____. Cause CPI to overstate cost of living increases:
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Variety 1. Substitution Bias 2. Introduction of New Goods 3. Unmeasured Quality Change
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Problems with CPI: When new goods become available, ____ increases.
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Fixed Basket of Goods Introduction of New Goods
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Allow consumers to find products that more closely meet their needs, which make each dollar more valuable. CPI misses the introduction of new goods because it uses ____.
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Quality, which is hard to measure Unmeasured Quality Change
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Improvements in the quality of goods in the basket increase the value of each dollar. CPI misses unmeasured quality change because it uses ____.
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COLAs, CPI Overstates; .05%
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The Bureau of Labor Statistics (BLS) has made technical adjustments, but the CPI probably still ____ inflation by about ____ per year. Social Security payments and many contracts have ____ tied to ____, so inflation is important.
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GDP Deflator CPI
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Uses a fixed basket. Uses the basket of currently produced goods and services.
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CPI; GDP Deflator Basket
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Matters if different prices are changing by different amounts. Imported consumer goods affect ____, but not ____.
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GDP Deflator; CPI Inflation
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Makes it harder to compare dollar amounts from different times. Capital goods affect ____, but not ____.
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Nominal Value of Earlier Year × CPI TodayCPI Earlier Year CPI
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figures so that dollar amounts from different times can be compared. Compare dollar
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Exam2 - Flashcards - The flashcards are formatted for...

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