CPI, GDP Deflator, Inflation, and Interest Rates

Flashcards based on lecture notes about CPI, GDP deflator, inflation, and interest rates.

How are imported consumer products treated in CPI and GDP deflator calculations?

Included in the CPI, excluded from the GDP deflator.

How are capital goods treated in CPI and GDP deflator calculations?

Excluded from the CPI, included in the GDP deflator.

What type of market basket does the CPI use?

A fixed quantity market basket.

What type of market basket does the GDP deflator use?

A market basket of currently produced products.

If Caterpillar raises the price of industrial tractors made in Illinois, what happens to the CPI and GDP deflator?

GDP deflator will rise, but the CPI will not be affected.

If Armani raises the price of Italian jeans sold in the US, what happens to the CPI and GDP deflator?

The CPI will rise, but the GDP deflator will not be affected.

What is the formula for converting dollar figures from different time periods to account for inflation?

Amount in today’s dollars = Amount in year T dollars * (Price level today / Price level in year T)

What is indexation?

A dollar amount is indexed for inflation if it is automatically corrected for inflation by law or in a contract.

What is the nominal interest rate?

The interest rate that is not corrected for inflation; the rate of growth in the dollar value of a deposit or debt.

What is the real interest rate?

The interest rate corrected for inflation; the rate of growth in the purchasing power of a deposit or debt.

What is the formula for the real interest rate?

Real interest rate = Nominal interest rate - Inflation rate

What is the formula for the nominal interest rate?

Nominal interest rate = Real interest rate + Inflation rate