Question

Question 2 15 pts What is the Consumer Price Index (CPI) and how is it determined each month? How does the Bureau of Labor Statistics calculate the rate of inflation from one year to the next? What effect does inflation have on the purchasing power of a dollar? How does it explain differences between nominal and real interest rates? How does deflation differ from inflation?

Answer 1

a representa goods of a given periodhet The Consumer brice Index CCPI) is an indicator ures that the anerage a Consumer change in frices paid by a for basket and services. ouer a given period. e steps to calculate II are as follows. 1 Fixing the basket of goods whose price has to be computed 2 Then the cost of the basket is at calculated the current prices and base year which is fixed in advance. 3 CPI inden = Cost of market basket in I current year x loo. Cost of market basket in base year 4 col is used to calculate inflation rate Inflation rate in = CP Iz - CP Iq 100 year 2 rest - Inflation Increase in inflation reduces the purchaing power of dollar and decrease in inflation increases the purchasing power of dollar. Inflation leade to difference in real and nominal rate of Real Real Rate - rate Rate of Interest - of Nominal Interest - of interest Rate. Deflation refers to decrease in the general price lend of and services goods lend whereas inflation of to increase in the general price level onds and services.