Chp. 6 - Measuring the Cost of Living

Chp. 6 - Measuring the Cost of Living - • ○ The nominal...

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Used to measure the inflation rate in the US Based on the cost of purchasing a fixed market basket of goods The CPI gives more weight to those goods and services purchased in greater quantities square4 Price of basket in base year CPI = Price of basket of goods and services x 100 The weights used to calculate the CPI are determined by each good and service weighted by their price The Consumer Price Index (CPI) is measured monthly by the Bureau of Labor Statistics Market Basket = the totals from each good multiplied by its price A price index is the cost of the market basket in the given year divided by the cost of the market basket in the base year and then multiplied by 100. Inflation Rate -% change in the price index (CPI) over a given year Dollar figures from different time periods can be compared using the CPI to adjust for the effects of inflation
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Unformatted text preview: • ○ The nominal interest rate minus the inflation rate • Real Interest Rate- the interest rate corrected for inflation ○ This is not beneficial to savers. ○ Borrowers are helped by negative interest rates. • A negative real interest rate means that money that is saved and is earning the nominal interest rate is actually losing purchasing power. • Indexation is the automatic adjustment of a sum of money to account for the effects of inflation. (19xx price) x (current CP I/ 19xx CPI) To find the value of past prices measured in current prices, take the past price and multiply it by (current CPI/past CPI) Chp. 6 Measuring the Cost of Living Exam 2 Material Page 1...
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