Over the past few years, one of the most closely monitored economic variables has been the inflation rate, which measures the change in the price level. Measuring it is complicated because different prices change by different amounts and sometimes in different directions (for example, the price of college tuition has been steadily rising for decades, whereas the price of TV sets has been decreasing). We can use the expenditure function to aggregate the change in the price level, by asking how much more it costs to achieve the same utility level under the new prices. That is, if the prices change from (P₁, P₂) to (P₁, P₂), where p₁ > p₁ and pź > P₂, we can define the inflation rate as:
Over the past few years, one of the most closely monitored economic variables has been the inflation rate, which measures the change in the price level. Measuring it is complicated because different prices change by different amounts and sometimes in different directions (for example, the price of college tuition has been steadily rising for decades, whereas the price of TV sets has been decreasing). We can use the expenditure function to aggregate the change in the price level, by asking how much more it costs to achieve the same utility level under the new prices. That is, if the prices change from (P₁, P₂) to (P₁, P₂), where p₁ > p₁ and pź > P₂, we can define the inflation rate as:
Macroeconomics: Principles and Policy (MindTap Course List)
13th Edition
ISBN:9781305280601
Author:William J. Baumol, Alan S. Blinder
Publisher:William J. Baumol, Alan S. Blinder
Chapter6: How Statisticians Measure Inflation
Section6.A: How Statisticians Measure Inflation
Problem 6TY
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