Principles of Economics Study Set 3

The consumer price index is used to monitor changes in an economy's production of goods and services over time.

When the consumer price index falls,the typical family has to spend fewer 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 absolute change in the price level from the previous period.

Inflation can be measured using either the GDP deflator or the consumer price index.

The inflation rate reported in the news is usually calculated from the GDP deflator rather than the consumer price index.

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.

The CPI is a measure of the overall cost of the goods and services bought by a typical consumer.

Each week,the Bureau of Labor Statistics computes and reports the consumer price index.

The Bureau of Labor Statistics is part of the U.S.Department of Labor.

The Bureau of Labor Statistics determines which prices are most important to the typical consumer by surveying consumers.

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

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.

When the consumer price index is computed,the base year is always the first year among the years being considered.

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 CPI is always 1 in the base year.

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

If the current year CPI is 90,then the price level has decreased 10 percent since the base year.

The inflation rate for 2007 is computed by dividing (the CPI in 2007 minus the CPI in 2006)by the CPI in 2006,then multiplying by 100.

If the value of the consumer price index is 110 in 2005 and 121 in 2006,then the inflation rate is 11 percent for 2006.