Question

What is the Consumer Price Index (CPI) and how is it determined each month? How does the Bureau of Labor Statistics (BLS) calculate the rate of inflation from one year to the next? What effect does inflation have on the purchasing power of a dollar? How does it explain differences between nominal and real interest rates? How does deflation differ from inflation? (Answer in your own words)

Answer 1

An CPI can be said as an index which  measures the prices of "market basket" of some 300 good and services that is assumed to be fixed and the services are brought by a "typical" consumer.

Explanation:

1)How does the Bureau of Labor Statistics (BLS) calculate the rate of inflation from one year to the next?

The Consumer Price Index is an index  which measures the prices of  market basket of goods and services and it  is used by the Bureau of Labor to calculate the rate of inflation, using the price of the basket from the current year divided by the base year, then multiplied by 100.

2)What effect does inflation have on the purchasing power of a dollar?

Inflation lowers the purchasing power of the dollar and it basically occurs when the market basket of goods is priced positively  with reference to  the rate of inflation.

3) How does it explain differences between nominal and real interest rates

A  real interest rate is an interest rate that takes into account the effects of inflation in order  to reflect the real cost of funds to the borrower and the real yield to an investor. A nominal interest rate refers to the interest rate that is calculated before taking the effects of inflation into account.

4)How does deflation differ from inflation?

Deflation occurs when the rate of inflation is negative.