Lecture 12 Inflation and Unemployment(1)

Lecture 12 Inflation and Unemployment(1) - Measuring...

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Measuring Inflation Price level: A measure of the average prices of goods and services in the economy. Inflation rate: The percentage increase in the price level from one year to the next. Consumer price index (CPI): An average of the prices of the goods and services purchased by the typical urban family of four. CPI Current Year = Cost of Base Period Quantities at Current Prices Cost of BaseYearQuantities at BaseYear Prices × 100 Inflation Rate = i = CPI Current Year CPI LastYear CPI Last Year × 100 CPI BaseYear = 100
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Is the CPI Accurate? It is important that the CPI be as accurate as possible, but there are four biases that cause changes in the CPI to overstate the true inflation rate: 1) Substitution Bias 2) Increase in Quality Bias 3) New Product Bias 4) Outlet Bias Monopoly vs. Competition Regular vs. Discount store GDP Deflator is a much broader way of measuring changes in prices.
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Interest Rates Nominal interest rate: The stated interest rate on a loan. Real interest rate:
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Lecture 12 Inflation and Unemployment(1) - Measuring...

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