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| Question | Answer |
| Who measures CPI and how often? | Every month, the Bureau of Labor Statistics measures CPI |
| What does CPI measure? | CPI measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and service. |
| What is the formula for CPI? | |
| What is the formula to measure the inflation rates from one period to the next? | |
| Is the CPI over or understated? Why? | The CPI is thought of as overstated, because it does not adjust for any quality improvements. If a product’s quality increases from one period to the next, it would make sense that its price increases as well. However, CPI only monitors the price increase. Many |
| What is the formula for the GDP deflator? | |
| What is one notable difference between CPI and GDP deflator? | One notable difference between CPI and GDP deflator is that if an imported good’s price increases, CPI accounts for the price change while GDP deflator does not |
| What are the four costs of inflation? | 1. Households receive higher incomes. 2. Inflation discourages savings. 3. Inflation causes resource misallocation. 4. Inflation shifts wealth from the lenders to the borrowers |
| What is the Fisher's Hypothesis? | Nominal Interest Rate=Real Interest Rate+Expected Inflation |
| What are the two ways unemployment is calculated? | Two broad surveys: one to businesses regarding employment levels at various business establishments, and the other to households. |
| What are the five categories of unemployment? | 1. Hidden work force or discouraged workers 2. Structural unemployment 3. Cyclical unemployment 4. Seasonal unemployment 5. Frictional unemployment |
| What is the NAIRU? | Since the majority of people counted as unemployed are frictionally unemployed, when the unemployment rate is around 4-6%, it is also known to economists as full employment. NAIRU stands for the nonaccelerating inflation rate of unemployment. |
| What happens when unemployment goes under 4-6%? | Inflation |
| 2. If the CPI goes to 150 from 120, then prices have | Risen 25% |
| FRQ Inflation exerts signifcant costs on the economy. Specifically, explain how inflation I. causes a misallocation of resources | Resources are spent dealing with rising prices and the repercussions of rising prices. Instead, these resources could have been spent producing more goods and services for the economy. |
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