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    CPI and stimulus package

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    Suppose that tuition prices suddenly go up 20 percent. What impact will this single price increase have on the CPI?

    Consider the recent stimulus package to help the strugling economy. what are the pros and cons of tax cuts or increased government spending as stimulative tools?

    Suppose the economy is slumping into recession and needs a fiscal policy boost. Voters however are opposed to large fiscal deficits. What should be done?

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    Solution Preview

    1. The CPI or the Consumer Price Index is one of the most widely quoted price indices in popular media, as well as in academic circles. With any price index, including the consumer price index, the biggest problem is that for practical purposes one cannot include every good or service produced in the economy. That means a consumer price index consists of a basket of goods and services, with some associated weight for each good and service, and the body monitoring prices (the Bureau of Labor Statistics in the US) gets a price index for this basket of goods, and uses this index as a representative of the average level of prices.

    The term average level is important here, since a change in the consumer price index does not mean that all prices under consideration have changed, or for that matter they have changed even in the same direction. It is possible for the price of a few goods to rise, but the index to fall, and vice versa. Keeping this in mind, we can only say that unless we have complete information about what is happening to all prices we cannot predict what will happen to the consumer price index. Based on the information provided about tuition rising by 20 percent it will be safe to say that there will be no, or very little, impact on the consumer price index. Price change of one good is not the same as a change in the index, and so in all likelihood there are no changes in the index.

    It will also be worthwhile to note that though that is the case most of the time, depending on how the ...

    Solution Summary

    The CPI or the Consumer Price Index is defined.