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Macroeconomics Week 7 notes

by: Garrett Anderson

Macroeconomics Week 7 notes econ 22061-002

Marketplace > Kent State University > Economcs > econ 22061-002 > Macroeconomics Week 7 notes
Garrett Anderson
GPA 3.951

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About this Document

These notes are the beginning of chapter 11.
Dr. Rohlin
Class Notes
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This 1 page Class Notes was uploaded by Garrett Anderson on Tuesday March 1, 2016. The Class Notes belongs to econ 22061-002 at Kent State University taught by Dr. Rohlin in Winter 2016. Since its upload, it has received 20 views. For similar materials see Macroeconomics in Economcs at Kent State University.


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Date Created: 03/01/16
Chapter 11 Consumer Price Index (CPI)  Measures the typical consumer’s cost of living Cost of living adjustment (COLA) How to calculate the CPI: 1. Fix the “basket” (what you buy)  what does average consumer buy?  Baske                                                2017 T­shirts $12 $15 $17 Tickets $190 $150 $175 Shoes $70 $80 $75 Total 272 245 267 Total = Cost of the “basket” 2. Find Prices 3. Compute cost of the basket  Add up total cost of basket 4. Choose a base year  CPI = (cost of basket current year / cost of basket base year) 5. Compute inflation rate = (CPI this year – CPI last year) / CPI last year * 100 CPI 2015 = (272 / 272) * 100 = 100 CPI 2016 = (245 / 272) * 100 = 90.07 CPI 2017 = (267 / 272) * 100 = 98.16 Inflation in 2016 = (90.07 – 100) / 100 * 100 = ­9.93% Inflation in 2017 = (98.16 – 90.07) / 90.07 * 100 = 8.98% Problems with CPI:  Substitution Bias Dan:  Sandwiches vs.  Pasta 100    100 80    120 Basket of goods is fixed but if prices for one good rises, people will buy less of that  good.  Introduction of new goods Ex.  New edition of iPhone  Unmeasured quality change  Air bag: Prices aren’t rising – we are getting a safer car with air bags. Improvements .5% ­ 1% overestimate with CPI


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