ECON 2010 Chapter : Inflation And The Price Level Chapter 5 Text Book Notes
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The first step is to pick a base year and determine the basket of goods and services that were consumed by the typical family during that year. The cpi in any given year is computed using this formula: Cpi= cost of base year basket of goods and services in current year/ Indexing to maintain buying power: the consumer price index also can be used to convert real quantities to nominal quantities, example: suppose, that in the year 2010 the government paid certain social security recipients. Congress would like the buying power of these benefits to remain constant over time so that the recipients" standard of living is unaffected by inflation. To achieve that goal, at what level should congress set the monthly social security benefit in the year 2015: suppose that the cpi has risen 20% between. That is, on average the prices of the goods and services consumers buy have risen.
