Baskets, Base Years, and Bias: Constructing and Using a Student Price Index

Lesson Objectives1. Define key terms such as market basket, consumer price index, inflation,

inflation rate, substitution bias, and unmeasured quality changes.2. Calculate a market basket value, a student price index number, and the

inflation rate.3. Contrast two market basket values, determining reasons for differences in

value.4. Simulate how changes in fiscal policy can affect the price level in the

economy.5. Simulate how changes in the money supply can affect the price of a

market basket of goods. 6. Describe how open market operations cause changes in the money

supply. 7. Create a short paper or presentation describing the strengths and

weaknesses of using a consumer price index as a measure of inflation.

Why does money have value?

The Fed Explained Video Series

Visual 1: Inflation Simulation

Visual 2: What is in the Consumer Price Index market basket?

Handout 2 - Student Market Basket

Visual 3 - Calculations Record Sheet

Analysis and Presentations

1. Merge with another group.

2. Answer question 13 a to f on Handout 1: Student Price Index Instructions.

3. Select a spokesperson.

4. Share answers.

Limitations of CPI as a Measure of Inflation

• Substitution bias

• Unmeasured quality changes

• Differences in individual purchasing patterns

• Introduction of new goods

Comparing Student Market Baskets

Actions that satisfy consumers’ wants

Objects that satisfy consumers’ wants

Agency that collects economic data

DescriptionWordMatch the terms to their definition::

The CPI less food and energy

Percentage change in the average price level

A general rise in prices

Person who uses goods and services

Measures the change in the price level from one time period to another

Inflation

Inflation rate

Core CPI

Bureau of Labor Statistics (BLS)

Consumer Price Index (CPI)

Goods

Services

Consumer