Sunday, January 24, 2010

Two-Minute Drill -- CPI and Inflation Rate

Summary: Calculate the inflation rate.

Assume that you are given data on the Consumer Price Index for four years. in 2006, 100; 2007, 110; 2008, 119.1; and 2009, 114.9. Calculate the inflation rate for 2007, 2008, and 2009.

My answers respectively are: 10%, 9.1%, and -4.2%.

Extra Credit. What is the real interest rate in 2009 if the nominal interest rate is 8%

Usually in AP Macroeconomics we exclude food and energy from the index since these items are volatile. I think a more accuate measure of prices would be to include all good for urban consumers since that would eliminate rural monopolies? I welcome your thoughts.

About the Author: Mike Fladlien is an AP Economics teacher from Muscatine High School in Muscatine, IA. He is also an author.


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