Week 6 - Inflation.pdf

2 the us uses the cpi to measure inflation the bls

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2. The US uses the CPI to measure inflation. The BLS calculates this. CPI t = $ cost of basket at current prices $ cost of basket at base year prices x 100 The selection of the base year can be largely arbitrary. Inflation rate is the percentage change in CPI from one year to the next. Inflation rate = (CPIt – CPIt−1) CPIt−1) x 100 3. The basket of goods is a collection of 80,000 goods and services that is representative of what an average household spends on. The CPI basked focuses on goods and services that a household/consumer would buy, whereas the GDP deflator basket looks at both consumer and producer goods. 4. Inflation is not always a bad thing. Low, positive inflation is generally considered desirable to have and helps both workers feel like wages are rising, and helps the economy keep churning along (along with the growth in money supply). Zero inflation is not really a target set by any government, and negative inflation, or deflation is considered a dire situation where AD is falling significantly (long recession). 5. Anticipated: The government announces higher value added taxes on goods set to kick in from next year. Expected to increase inflation as prices go up slightly.
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