22. The CPI and the Cost of Living. CHAPTER. 1. 2. 3. C H A P T E R C H E C K L I S T. When you have completed your study of this chapter, you will be able to. Explain what the Consumer Price Index (CPI) is and how it is calculated.
The CPI and the
Cost of Living
3C H A P T E R C H E C K L I S T
Explain the limitations of the CPI as a measure of the cost of living.
An increase in the general (average) price level of goods and services in the economy
A decrease in the general (average) price level of goods and services in the economy
Figure shows the CPI basket.
This shopping cart is filled with the items that an average household buys.
Table shows the consumer price index: a simplified CPI calculation.
Figure shows the CPI in part (a) and the inflation rate in part (b).
In part (a), the price level has increased every year. The rate of increase was rapid during the early 1980s and slower during the 1990s.
In part (b), the inflation rate was high during the early 1980s, but low during the 1990s.
Think about your student loan—or if you don’t have one, think about Gus’s $80,000 loan.
Suppose that the CPI rises by 3 percent a year, each year from now through 2025.
How much will a $100 repayment cost you, in 2005 dollars, when you start to pay off your loan in 2015?
How much will a $100 repayment cost you, in 2005 dollars, when you make your final payment in 2025?
What is the real interest rate that you will have paid?
Would you be better off or worse off if the CPI began to rise at 5 percent a year?