Exam 11: Measuring the Cost of Living: Part B

When the consumer price index falls,the typical family has to spend fewer dollars to maintain the same standard of living.

When the price of nuclear missiles rises,this change is reflected in the CPI but not in the GDP deflator.

Because the consumer price index reflects the goods and services bought by consumers better than the GDP deflator does,it is the more common gauge of inflation.

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 5 percent during the year the money was deposited,then Bob's purchasing power has not changed.

By keeping the basket of goods and services the same when computing the CPI,the Bureau of Labor Statistics isolates the effects of price changes from the effect of any quantity changes that might be occurring at the same time.

In a period of inflation real interest rates will be greater than nominal interest rates.

If you currently make $25,000 a year and the CPI rises from 110 today to 150 in five years,then you need to be making $43,333.33 in five years to have kept pace with consumer price inflation.

Data from the Bureau of Labor Statistics show that consumer spending on transportation is only slightly higher than consumer spending on food and beverages.

The CPI and GDP deflator usually tell two different stories about how quickly prices are rising.

During periods of deflation,the real interest rate will be lower than the nominal interest rate.

The content of the basket of goods and services used to compute the CPI changes every month.

Data from the Bureau of Labor Statistics show that apparel makes up 14 percent of the typical consumer's budget.

If the quality of a good deteriorates from one year to the next while its price remains the same,then the value of a dollar falls.

The CPI for 2008 is computed by dividing the price of the basket of goods and services in 2008 by the price of the basket of goods and services in the base year,then multiplying by 100.

The largest sector in the consumer price index market basket is food and beverage purchases.

If the current year CPI is 140,then the price level has increased 40 percent since the base year.

Consumer price index = × 100.

If the nominal interest rate is 5 percent and the real interest rate is 2 percent,then the inflation rate is 3 percent.

Substitution bias causes the CPI to understate the increase in the cost of living from one year to the next.

The goal of the consumer price index is to gauge how much incomes must rise to maintain a constant standard of living.