Macroeconomics Exam 2 Study Guide

# Macroeconomics Exam 2 Study Guide - Macroeconomics Exam 2...

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Macroeconomics Exam 2 Study Guide Chapter 6 Summary How the consumer price index is calculated: (example of hot dogs and hamburgers) o 1. Fix the basket. (deteroipmine which prices are more important to the consumer) 4 hot dogs and 2 hamburgers o 2. Find the prices. (find the prices of each of the goods at each point in time Year \$hot togs \$hamburgers 2008 \$1 \$2 2009 \$2 \$3 2010 \$3 \$4 o 3. Compute the basket’s cost: 2008: (1 per hot dog x 4 hot dogs) +(2perham x 2 ham) =\$8 per basket 2009: (2 per hot dog x 4 hot dogs) +(3 per ham x 2 ham) =\$14 2020: (3 per hot dog x 4 hot dogs) +(4 per ham x 2 ham)= \$20 o 4. Choose a base year and compute the index. (2008) 2008 (8/8) x 100 = 100 2009 (14/8) x 100 = 175 2010 (20/8) x 100 = 250 o 5. Use the consumer price index to compute the inflation rate from previous year 2009 (175-100)/100 x 100 =75% 2010 (250-175) / 175 x 100 = 43% Consumer price index = price of basket of goods and services in current year / price of basket in base year x 100. Inflation rate in year 2 = CPI in year 2 – CPI in year 1 / CPI in year 1 x 100 Amount in today’s dollars = amount in year T dollars x (price level today /price level in year T) o Example on page 122 The GDP deflator differs from the CPI because it includes goods and services produced rather than goods and services consumed. As a result, imported goods affect the consumer price index but not the GDP deflator. In addition, while the CPI uses a fixed basket of goods, the GDP deflator automatically changes the group of goods and services over time as the composition of GDP changes. consumer price index (CPI) a measure of the overall cost of the goods and services bought by a typical consumer indexation the automatic correction by law or contract of a dollar amount for the effects of inflation inflation rate the percentage change in the price index from the preceding period nominal interest rate the interest rate as usually reported without a correction for the effects of inflation producer price index a measure of the cost of a basket of goods and services bought by firms real interest rate the interest rate corrected for the effects of inflation

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To fix the basket for the CPI, the Bureau of Labor Statistics: a. sets up a committee that decides, based on its own experience, what items will be in the basket. b. reviews the things produced in our economy and selects some of these to include in the basket. c. reviews national expenditure patterns in the economy, and selects a basket that reflects these patterns. d. surveys a large number of consumers to find what they buy, then fixes a basket based on its findings. status:
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Macroeconomics Exam 2 Study Guide - Macroeconomics Exam 2...

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