# how the Consumer Price Index is calculated

Can anyone find out how the Consumer Price Index (CPI), the primary measure of inflation used by the government, is calculated? Why might this method not reflect the real cost of living increase for the average person?

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#### Solution Preview

The CPI is the culmination of a series of many samples. Using data from the most recent Population Census, the Bureau of Labor Statistics (BLS) picks the urban areas from which data on prices were collected and selects the housing units in each area that were eligible for use in the shelter component of the CPI. The Census also gave info on the amount of consumers represented by each area selected as a CPI price collection area. Next, another sample (of about 14,500 families each year) was used as the source for a Point-of-Purchase Survey that noted the places where households purchased specific kinds of goods and services.

source: http://www.bls.gov/cpi/cpifaq.htm

More on the CPI:

The Consumer Price Index (CPI) is one of the most ...

#### Solution Summary

The expert determines how consumer price index is calculated.

The solution gived detailed steps on solving several questions. The topic includes nominal GDP, real GDP, GDP deflator, CPI, Keynesian-cross model and IS-LM model. All formula, calculations and graphs are shown and explained.

Study Guide #1

Please Show Work

PROBLEM 1

Using exhibit 1

a. What is the nominal GDP in 2010?

b. What is the nominal GDP in 2011?

c. What is the real GDP in 2011 (using 2010 prices)?

d. What is the real GDP growth from 2010 to 2011?

e. What is the GDP deflator for 2011?

*see attached file for data

Exhibit 1

PROBLEM 2

Using the information on exhibit 2 calculate the consumer price index in the current year.

Exhibit 2

*see attached file for data

PROBLEM 3

Assume that the consumption function is given by C=200+0.5(Y-T), I=800, G=300, and T=200.

a. Calculate the equilibrium Y.

b. How much is consumption?

c. Suppose the government wants to achieve a level of Y=2,000. What level of T must be set to achieve the goal? Where C=200+0.5(Y-T), I=800, and G=300

PROBLEM 4

Use the Keynesian-cross model to illustrate graphically the impact of an increase in taxes on the equilibrium level of income.

PROBLEM 5

Suppose the economy is represented by the following equations:

Md/P = 6Y - 120r Ms/P = 5,400

C = 180 + 0.7(Y-T) I = 100 - 18r + 0.1Y T = 400 G = 400

Y = C + I + G

a. Write the numerical formula for the IS curve?

b. Write the numerical formula for the LM curve?

a. What is the equilibrium level of r?

b. What is the equilibrium Y?

c. What is the value of consumption?

d. What is the value of Investment?

e. What is the level of real Money Demand?

PROBLEM 6

Using the IS-LM model to answer these questions:

a. Suppose taxes increase. Illustrate graphically what effect will this on the IS curve, the LM curve, equilibrium output, and equilibrium interest rate.

b. What effect will this increase in T have on consumption?

c. What effect will this increase in T have on investment?

PROBLEM 7

Using the IS-LM model to answer these questions:

a. Suppose the money supply decreases. Illustrate graphically what effect will this on the IS curve, the LM curve, equilibrium output, and equilibrium interest rate.

b. What effect will this decrease in Ms have on consumption?

c. What effect will this decrease in Ms have on investment?