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2022 Thomson SouthWestern ? The GDP deflator differs from the CPI because it includes goods and services produced rather than goods and services consumed. ? In addition, the CPI uses a fixed basket of goods, while the GDP deflator automatically changes the group of goods and services over time as the position of GDP changes. Summary 169。 2022 Thomson SouthWestern ? The consumer price index shows the cost of a basket of goods and services relative to the cost of the same basket in the base year. ? The index is used to measure the overall level of prices in the economy. ? The percentage change in the CPI measures the inflation rate. Summary 169。 2022 Thomson SouthWestern Real and Nominal Interest Rates ? You borrowed $1,000 for one year. ? Nominal interest rate was 15%. ? During the year inflation was 10%. ? Real interest rate = Nominal interest rate – Inflation ? = 15% – 10% = 5% 169。 2022 Thomson SouthWestern Real and Nominal Interest Rates ? Interest represents a payment in the future for a transfer of money in the past. 169。 2022 Thomson SouthWestern Indexation ? When some dollar amount is automatically corrected for inflation by law or contract, the amount is said to be indexed for inflation. 169。 2022 Thomson SouthWestern Dollar Figures from Different Times ? Do the following to convert dollar values from year T into today’s dollars: Amount in today’s dollars Amount in year T’s dollars Price level today Price level in year T ? 169。 2022 Thomson SouthWestern Figure 2 Two Measures of Inflation 1965 Percent per Year 15 CPI GDP deflator 10 5 0 1970 1975 1980 1985 1990 2022 1995 2022 169。 2022 Thomson SouthWestern The GDP Deflator versus the Consumer Price Index ? The GDP deflator reflects the prices of all goods and services produced domestically, whereas... ? … the consumer price index reflects the prices of all goods and services bought by consumers. 169。 2022 Thomson SouthWestern The GDP Deflator versus the