Exam 11: Measuring the Cost of Living: Part B

The real interest rate measures the change in dollar amounts.

Data from the Bureau of Labor Statistics show that the largest category of consumer spending is housing.

There is no longer much debate among economists concerning the severity of and the solution to the problems in using the CPI to measure the cost of living.

The value of the consumer price index increased from 140 to 147 during 2006.Nathan opened a bank account at the beginning of 2006,and at the end of 2006 his account balance was $12,840.The purchasing power of Nathan's account increased by 2 percent during the year.We can conclude that Nathan opened his account with a deposit of $11,500 at the beginning of 2006.

Core CPI is a price index that only looks at the prices of food and energy and ignores the prices of all other goods and services.

Inflation can be measured using either the GDP deflator or the consumer price index.

Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent.A year later,Bob withdraws his $105.If inflation was 2 percent during the year the money was deposited,then Bob's purchasing power has increased by 3 percent.

The CPI is always 1 in the base year.

In comparison to the situation in the late 1970s,the United States experienced lower nominal interest rates and higher real interest rates in the late 1990s.

A COLA automatically raises the wage when the CPI rises.

Substitution bias occurs because the CPI ignores the possibility of consumer substitution toward goods that have become relatively less expensive.

If the real interest rate is 5 percent and the inflation rate is 2 percent,then the nominal interest rate is 7 percent.

Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent.A year later,Bob withdraws his $105.If inflation was 7 percent during the year the money was deposited,then Bob's purchasing power has increased by 2 percent.

The nominal interest rate tells you how fast the number of dollars in your bank account rises over time.

When consumer spending is broken down into the major categories of goods and services,the largest single category is spending on transportation.

Economists use the term inflation to describe a situation in which the economy's overall price level is rising.

If the value of the consumer price index is 110 in 2005 and 121 in 2006,then the inflation rate is 11 percent for 2006.

The Bureau of Labor Statistics does not try to account for quality changes in the goods and services in the basket used to compute the CPI.

The inflation rate is the absolute change in the price level from the previous period.

The U.S.income tax system is completely indexed for inflation.