1. Define the Consumer Price Index
CPI = A measure of the overall cost of the goods and services bought by a typical consumer.
2. How it is calculated?
Fix the basket: Determine which prices are most important to the typical consumer (things that consumers buy more should be given greater weight).
Find the prices: Find the prices of each of the goods and services in the basket for each point in time
Compute the Basket´s cost: Calculate the cost of the basket of goods and services at different times.
Choose a base year and compute the index: The base year is the benchmark against which other years are compared. To calculate the index, the price of the basket of goods and services in each year is divided by the price of the basket in the base year, and this ratio is then multiplied by 100.
3. How do you calculate the inflation rate?
first, a base year needs to be established in order to be able to observe the changes in prices over a given period of time. This will then determine the percentage change in the price index from the preceeding period, for example over a 2 year period.
In order to calculate the rate, the CPI of the second year is subtracted from the CPI of the base year, then divided by the base year CPI and multiplied by 100

4. What are some of the problem associated with measuring the cost of living?

5. How is the CPI basket broken down?
The basket is composed of the typical goods and services an average consumer may buy. This is a fixed basket which rarely changes its components and therefore reflects the average prices of consumer products in general
6. Is the CPI accurate?
Not completely accurate because...

• Does not take into account consumers' ability to substitute toward goods that become relatively cheaper over time
• Does not take into account increases in the purchasing power of the dollar due to the introduction of new goods
• It is distorted by unmeasured changes in the quality of goods and services
• CPI overstates the annual inflation rate by about 1%

7. Define GDP deflator
The GDP deflator is the ratio of nominal GDP to real GDP.

8. Deflator vs. CPI, which is better?

9. What is indexation?
The automatic correction of a dollar amount for the effects of inflation by law or contract.
10. Define real vs. nominal interest rates
Real = the interest rate corrected for the effects of inflation
Nominal= the interest rate as usually reported without a correction for the effects of inflation
11. How do you correct economic variables for the cost of inflation?

12. How might retirees suffer from the states CPI rates?