ECON 1BB3 Chapter 6: Chapter 6
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ECON 1BB3 Full Course Notes
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When consumer price index cpi) rises, typical family has to spend more dollars to maintain the same standard of living. It is a measure of overall cost of the goods and services bought by a typical consumer. Of time: compute the basket"s cost: as in the tablenotice only prices r changed n quantities r constant, choose a base year n compute the index: Cpi = (price of goods in one year/price in base year) * 100: compute the inflation rate: Inflation rate in yr 2 = [(cpi in yr 2 cpi in yr 1)/cpi in yr 1] * 100. Core inflation: the measure of underlying trend of inflation. 3 prbms: substitutions bias: prices do not change proportionately from one year to the next; some rise more than others. Consumers respond to them by buying less expensive goods. But in cpi case we have fixed basket of goods; so it ignore possibility of consumer substitution.