AP Macro Inflation Quiz

If the base year is 2017, then the economy's inflation rate in 2018 is

c. -24 - solve for the base year = 809 - solve for the nominal in 2018=615 - find deflator for both (divide nominal by base year) = 100 & 76 - 76-100/100 = -.24

In 1931, President Herbert Hoover was paid a salary of $75,000. Government statistics show a consumer price index of 15.2 for 1931 and 307.1 for 2023. President Hoover's 1931 salary was equivalent to a 2023 salary of about

c. 1,515,296 - $75,000(307.1/15.2)

if 2018 is the base year then the inflation rate in 2019 was

c. 36.1 - 147/108 - 108/108 - 136.1-100/100

An important difference between the GDP deflator and the consumer price index is that

The GDP deflator reflects the prices of all final goods and services produced domestically, whereas the consumer price index reflects the prices of goods and services bought by consumers

which of the following allows an individual to gain from unexpected inflation

a. borrowing money at a fixed interest rate - if inflation rises and they still give the same amount of money, the money has less value so it is less

When the consumer price index rises, the typical family

a. has to spend more dollars to maintain the same standard of living - if wages do not also increase, then they must spend more in order to have the same things

The nominal interest rate tells you

a. how fast the number of dollars in your bank account rises over time - nominal looks at just the money and disregards inflation. Real interest would tell you the purchasing power of your bank account

which of the following would most likely benefit from unexpected deflation

a. lenders - they would get all the money back and it would have more value

The producer price index measures the cost of a basket of goods and services

a. sold by producers

In calculating the CPI, a fixed basket of goods and services is used. The quantities of the goods and services in the fixed basket are determined by

a. surveying consumers

If the base year is 2018, then the consumer price index (rounded to the nearest whole number was)

b. 132 in 2017, 100 in 2018, and 109 in 2019 - to find the CPI you must divide the basket year t by basket base year

the real interest rate tells you

b. how fast the purchasing power of your bank account rises over time

The consumer price index tries to measure how much consumer incomes must rise in order to maintain a constant

b. standard of living

The substitution bias in the consumer price index refers to the

b. substitution by consumers toward goods that have become relatively less expensive and away from goods that have become relatively more expensive - when inflation occurs consumers lean toward products that did not change as much which messes up the calculation of inflation

The CPI is a measure of overall cost of

b. the goods and services purchased by a typical consumer - Consumer Price Index focuses on the price consumers pay

The cost of the basket in 2019 was

c. $147 - (3x$25)+(4x$18)=$147

Suppose OPEC succeeds in raising world oil prices by 300 percent. This price increase causes inventors to look at alternative sources of fuel for internal-combustion engines. A hydrogen-powered engine is developed which is cheaper to operate than gasoline engines. Which problems in the construction of the CPI does this situation represent?

c. Substitution bias and introduction of new goods - OPEC chooses a new engine (substitution) and this engine is introduced to the economy (introduction of new goods)

to which of the problems in the construction of the CPI is the creation of the mobile phone most relevant

c. introduction of new goods - this item was newly introduced to the economy

which of the following is not correct?

c. the consumer price index is used to measure the quantity of goods and services that the economy is producing - the consumer price index is used to measure the amount consumers spend on items

Suppose that in 2020, the producer price index increases by 1.5%. As a result, economists most likely predict that

c. the consumer price index will increase in the future - if producers are selling items at a greater cost, the average consumer will have to purchase at a greater price causing CPI to increase

the term inflation is used to describe a situation in which

c. the overall level of prices in the economy is increasing

Consternation Corporation has an agreement with its workers to index completely the wages of its employees using the CPI. Consternation Corporation currently pays its production line workers $7.50 an hour and is scheduled to index their wages today. If the CPI is currently 130 and was 125 a year ago, the firm should increase the hourly wages of its workers by

d. $0.30 - $7.50(130/125)= $7.80 - 7.80-7.50= $0.30

if 2018 is the base year, then the CPI for 2019 was

d. 136.1 - 147/108

An increase in the price of dairy products produced domestically will be reflected in

d. both GDP and the consumer price index - more money will be spent which will affect both

The GDP deflator reflects the

d. current level of real output relative to the level of real output in the base year - nominal/real(uses base year)

the CPI is more commonly used as a gauge of inflation that the GDP deflator because

d. the CPI better better reflects the goods and services bought by consumers - the GDP deflator reflects a wider range of goods and services where the CPI is more closely related to the market and the purchasing power of consumers