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1. select representative base year2. decide which goods will be put in the CPI based on the household budget survey3. gather data (obtain price of each good for each time period being observed)4. observe how much a typical consumer spends on the good as a proportion of total income5. multiply the price change index for each component of the index by its weight6. add up all the prices changes to get the overall change in price

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Suppose that the Fed judges inflation to be the most significant problem in the economy and that it wishes to employ all three of its policy​ instruments, then the Fed will engage inA.open market​ sales, increasing the reserve​ requirement, and increasing the discount rate.B.open market​ sales, decreasing the reserve​ requirement, and increasing the discount rate.C.open market​ purchase, increasing the reserve​ requirement, and decreasing the discount rate.D.open market​ purchase, increasing the reserve​ requirement, and increasing the discount rate.

Keynes believed thatA. the economy is always self-regulating.B. the economy could get stuck in a recessionary gap.C. the economy is never self-regulating.D. wages are always flexible.

The headline on an article in the Wall Street Journal​ was: "Why Ice Cream is More Important Than Bacon When Tracking​ Inflation."​Source: Sarah​ Chaney, "Why Ice Cream is More Important Than Bacon When Tracking​ Inflation," Wall Street Journal​, April​ 17, 2017.Considering how the CPI is​ constructed, why would ice cream be more important than bacon in calculating​ inflation?A.Ice cream would be more important if consumers spent a higher fraction of their budgets on ice cream than on bacon.B.Ice cream would be more important because consumer biases for bacon will tend to understate the true inflation rate.C.Ice cream would be more important because the consumption of ice cream is more constant over time.D.Ice cream would be more important since it is more representative of a typical market basket for a family of four.

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