In the average level of prices such that a price index increase of 10% means that the average level

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In the average level of prices such that a price index increase of 10% means that the average level of prices has risen by 10%. Price index = current cost of basket/base-period cost of basket Learning Activity #5: Price Index Exercise The Federal Reserve has dual targets which are to maintain adequate economic growth rate and to keep a low level of inflation. Using data from http://www.bls.gov/cpi/ graph the US inflation the rate of inflation or deflation is the percentage rate of change in a price index. A price index (Chapter 5.2 Price-Level Changes) is a number whose movement reflects movement rate before, during, and after the 2008 recession. Determine which components of the CPI were more volatile (fluctuated the most) and what you think were the factors behind such fluctuations.

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Answer------------What difference does it make if the average level of prices changes? First, consider theimpact of inflation.Inflation is measured as the annual rate of increase in the average level of prices. Figure 5.6,inflation, 19602008 shows how volatile inflation has been in the united states over thepast four decades. In the 1960s the inflation rate rose, and it became dramatically worse in the1970s. The inflation rate plunged in the 1980s and continued to ease downward in the 1990s.It remained low in the early 2000s and began to accelerate in 2007 and during most of 2008.Figure 5.6. Inflation, 19602008The u.s. inflation rate, measured as the annual rate of change in the average level of pricespaid by consumers, varied considerably over the 19602008 period.Whether one regards inflation as a good thing or a bad thing depends very much on oneseconomic situation. If you are a borrower, unexpected inflation is a good thingit reducesthe value of money that you must repay. If you are a lender, it is a bad thing because itreduces the value of future payments you will receive. Whatever any particular personssituation may be, inflation always produces the following effects on the economy: it reducesthe value of money and it reduces the value of future monetary obligations. It can also createuncertainty about the future.Suppose that you have just found a \$10 bill you stashed away in 1990. Prices have increasedby about 50% s

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