Changes in the PPI are often thought to be useful for predicting changes in the CPI because firms eventually pass on their costs to __________________ in the form of __________________.consumers, higher consumer pricesCPI tries to guage how much __________________ must rise to maintain a __________________.incomes, constant standard of living.3 problems to CPIsubstitution bias, introduction of new goods, unmeasured quality change[CPI: Substitution Bias]
When prices change from one year to the next, they (do/ do not) change proportionately. Consumers respond to these differing price changes by __________________. If a price index is computed assuming a __________________, it ignore the possibility of consumer substitution and overstates the __________________ in the cost of living from one year to the next.do not, buying less of the goods whose prices have risen and buying more of the goods whose prices have risen less or fallen, fixed basket of goods, increase[CPI: Introduction of new goods]
When a new good is introduced, consumers have more __________________, and this __________________the cost of maintaining the ____________________________________. As new goods are introduced, consumers have more choices, and each dollar is __________________. But because the CPI is based on ____________________________________, it does not reflect the ______________________________________________________ that results from the introduction of new goods.variety, reduces, same level of economic well-being, worth more, a fixed basket of goods and services, increase in the value of the dollar (thus reduction in the cost of living )[CPI: Unmeasured Quality Change]
If the quality of a good deteriorates from one year to the next while its __________________ remains the same, you are getting a __________________ good for the __________________amount of money, so the ____________________________________ falls. If the quality rises from one year to the next, the __________________ rises.price, lesser, same, value of a dollar, value of a dollarBoth the GDP deflator and the CPI are used to :gauge how quickly prices are risingGDP deflator reflects the prices of ________________________________________________________________________, whereas the CPI reflects the prices of ______________________________________________________.all goods and services produce domestically, all goods and services bought by consumersThe price of an airplane produced by Boeing and sold to the Air Force rises (this would be tallied in GDP or CPI?)it would show up on the GDP deflator because it is not part of the basket of goods and services bought by a typical consumer.Volvo raises the price of its cars. Volvos are made in Sweden. (this would be tallied in GDP or CPI?)it would show up on the CPI because it is an imported consumption goodThe CPI compares the price of a ___________with the price of the basket in the base year. GDP deflator compares the price of ___________.fixed basket of goods and services, currently produced goods and servicesIf the prices of different goods and services are changing by varying amounts, the way we weight the various prices affects the calculation of _________________________________.the overall inflation rateThe largest component in the basket of goods and services used to compute the CPI ishousingIf a Pennsylvania gun manufacturer raises the price of rifles it sells to the U.S. Army, its price hikes will increasethe GDP deflatorBecause consumers can sometimes substitute cheaper goods for those that have risen in price,the CPI overstates inflationThe formula for turning dollar figures from year T into today's dollars is:amount in today's dollars = amount in year T dollars x (Price level today/ price level in year T)Indexationthe automatic correction by law or contract of a dollar amount for the effects of inflationexamples of laws that undergo indexationsocial security benefits, federal income taxFUture dollars could have a different ___________ than today's dollars. Because of this, you must correct for the effects of___________.value, inflationLet's say you receive 100 interest for depositing 1000 in the bank. If prices have risen while your money was in the bank, each dollar now buys ___________ than it did a year ago. In this case, your ______________________ which is the amount of _________________________________, has not risen by ___________.less, purchasing power, goods and services you can buy, 10 percentIf there is zero inflation, the price of a good (does / does not ) change and your percent increase in the number of ___________ indicates the ___________ percent increase in her ______________________.dollars, the same, purchasing powerIf the price of a ticket rises from $10 to $10.60, then the number of tickets you can buy with 1100 dollars has risen from 100 to about 104, then your purchasing power has increased by:about 4 percent.If the price of a ticket rises from $10 to $11, with $1100 you can buy ___________ tickets, if this were the same amount you could buy when you still had $100, there is a ___________ percent inflation and your purchasing power is the ___________.100, 10, sameIf a price of a ticket falls from $10, to $9.80, then the number of tickets she can buy rises from 100 to approximately 112, her purchasing power:increases by about 12 percentIf the rate of inflation exceed the ______________________, one's purchasing power (rises/falls). If there is deflation, her purchasing power (falls/rises) by more than the ___________.rate of interest, falls, rises, rate of interestto understand how much a person earns in a savings account, we need to consider both the:interest rate and the change in pricesWhat is nominal interest rate?the interest rate as usually reported without a correction for the effects of inflationwhat is the real interest rate?the interest rate corrected for the effects of inflaitonreal interest rate =nominal interest rate - inflation rateThe nominal interest rate tells you how:fast the number of dollars in your bank account rises over timeThe real interest rate tells you how:fast the purchasing power of your bank account rises over time.