Chapter 9 Question 10 A Inflation is a general and ongoing rise in the level of

Chapter 9 question 10 a inflation is a general and

This preview shows page 3 - 4 out of 4 pages.

Chapter 9: Question 10: A. Inflation is a general and ongoing rise in the level of prices in an economy. Deflation is negative inflation; which means that most prices in the economy are falling. B. Three examples of price levels/indices used to calculate inflation rate are: the consumer price index (CPI), producer price index, and implicit price deflator. C. The formula for inflation/deflation rate is x 100 current CPI ( current CPI initial CPI )
Image of page 3
4 D. If the base year had a CPI of 100 and the current year had a CPI of 125, the inflation rate for year two would be 20%. E. If the CPI is not given, these steps are used to find it: a. Select the basket of goods and services to be indexed. b. Compute the cost of a basket of goods and services during the base year. c. Compute the cost of a basket of goods and services in the current year. d. Divide the cost of the current year by the base year. Question 11: A. The magnitude of the bias relating to CPI as a measurement of the cost of living is pretty extensive. This is because the cost of living depends on how much each individual is comfortable spending in order to be completely satisfied. That cannot be determined to the tea for every person in an economy. B. Three sources of this bias are: substitution bias, new goods bias, and quality bias. The substitution bias states that using the “fixed basket of goods” method of measuring inflation rate tends to overstate the true rise in the cost of living, because it does not consider the fact that people can substitute away goods whose prices increase significantly. C. The inflation rate that excludes volatile economic variables such as energy and food prices is called core inflation rate. D. The dangers of inflation are: the land of funny money (the idea that if wages, prices, interest rates, etc. adjusted automatically with inflation, the economic status of everyone would not change), unintended redistributions of purchasing power (people can be affected negatively or positively as far as purchasing power by this depending on their investments, savings, etc.), blurred price signals (the prices of goods and services become harder to perceive), and problems of long-term planning (because it is hard to determine the rate of future inflation, people/businesses may unexpectedly lose or gain money that they have saved up/ invested over a long period of time). E. Governments and private sectors attempt to minimize inflation by using indexing: prices, wages, or interest rates are adjusted automatically for inflation.
Image of page 4

You've reached the end of your free preview.

Want to read all 4 pages?

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes