ECO 1102 Lecture 6: Lecture 6

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The consumer price index is used to monitor changes in the cost of living over time. When the consumer price index rises, the typical family has to spend more dollars to maintain the same standard of living. Economists use the term inflation to describe a situation in which the economy"s overall price level is rising. The inflation rate is the percentage change in the price level from the previous period. The consumer price index (cid:0) t h e consumer price index (cpi): the overall measure of the cost of the goods and services bought by a typical consumer. Every month, statistics canada computes and reports the cpi. It uses data on the prices of more than 600 different goods and services. To see how these statistics are constructed, a simple economy with two goods, hot dogs and hamburgers, is used.

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Table 24-7. The table below applies to an economy with only two goods â hamburgers and hot dogs. The fixed basket consists of 4 hamburgers and 8 hot dogs.

Year	Price of hamburgers	Price of hot dogs
2009	$5	$3
2010	5.50	3.30
2011	5.61	3.63

Refer to Table 24-7. Between 2009 and 2011, the cost of living increased by

The CPI is more commonly used as a gauge of inflation than the GDP deflator is because

A. the CPI is calculated more often than the GDP deflator is.

B. the CPI is easier to measure.

C. the GDP deflator cannot be used to gauge inflation.

D. the CPI better reflects the goods and services bought by consumers.

A COLA automatically raises the wage when:

A. the consumer price index increases.

B. the producer price index increases.

C. taxes increase.

D. GDP increases.

Measures of Inflation The GDP deflator is the broadest, most inclusive measure of change in the country's price level since it includes all final goods and services produced and sold. But the GDP deflator is not used by the government or economists as the benchmark measure of inflation; instead, the consumer price index (CPI) is used to determine changes in the cost of living. What is the shortcoming of the GDP deflator as a measure of inflation for households, and why is the CPI considered to be a more useful measure?

greycoyote29

1. The peak of the business cycle

a. usually occurs when the natural rate of unemployment is equal to its actual rate.

b. is the point where an expansion ends and a recession begins

c. is the minimum level of nominal GDP.

2. The consumer price index (CPI) reflects

a. the median annual expenditures of a typical single family of four on consumer goods

b. the average price of all goods and services computed from the ratio of nominal GDP to real GDP.

c. the changes in the prices of goods and services typically purchased by consumers.

3. The Consumer Price Index is NOT used

a. to measure the average price level of all final goods and services produced

b. to compute the U.S. inflation rate.

c. to measure changes in the cost of living

4. Which of the following is true of a price index that uses a fixed market basket?

a. It excludes new goods and services

b. It accurately predicts the impact of rising prices when purchases are made at superstores.

c. It overstates the importance of items that fall in price.

5. A quality-change bias in the construction of the CPI arises because

a. big box stores that carry electronic goods routinely run sales to reduce their inventories before stocking new models.

b. consumers also shop at superstores or outlet stores

c. newer versions of a product might be more expensive but could also be better than the older version.

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ECO 1102 Lecture 6: Lecture 6

ECO 1102 Full Course Notes

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