ECO 202-Exam 1 HW 2 Review

If the CPI was 207 in 2009 and 225 in 2013, what wage would someone who earned a $50,000 income in 2009 have to earn in 2013 in order to keep her purchasing power constant?

$54,348

"If a recession is so severe that the price level declines, then we know that both real GDP and nominal GDP must decline."

Agree; if both output and prices are falling, then both real GDP and nominal GDP will fall.

"If real GDP stayed the same while nominal GDP declined between 2008 and 2009, then the GDP deflator must also have declined."

Agree; if nominal GDP declined between 2008 and 2009, then the GDP deflator must have also declined.

"Whenever real GDP declines, nominal GDP must also decline."

Disagree; real GDP falls if output falls. Nominal GDP can increase if output falls and prices rise.

During the late nineteenth century in the United States, many farmers borrowed heavily to buy land. During most of the period between 1870 and the mid 1890s, the United States experienced mild deflation. Many farmers engaged in political protests during these years, and deflation was often a subject of their protests. Why would farmers have felt burdened by deflation during this period?

During deflationary periods, the real interest rate exceeds the nominal interest rate, and the real cost of borrowing increases.

An average of the prices of the goods and services purchased by a typical family is the:

consumer price index (CPI)

Since nominal incomes increase with inflation,

expected inflation does not affect the purchasing power of the average consumer.

All of the following are problems caused by deflation except

firms make higher profits as consumers buy more goods and services

What is the rule of 70? The rule of 70

is a mathematical formula that is used to calculate the number of years it takes real GDP per capita or any other variable to double.

The chapter explains that it is impossible to know whether a particular nominal interest rate is "high" or "low" because

it all depends on the inflation rate.

A consumer price index of 234.6 in December 2013 with a base period of 1982-84 means that the cost of the market basket in December 2013

rose 134.6 percent from the cost of the market basket in the base period.

For a given positive inflation rate,

the nominal interest rate is always higher than the real interest rate, and the real interest rate may be positive or negative

If inflation is expected to increase,

the nominal interest rate will increase

The two key factors that cause labor productivity to increase over time are

the quantity of capital per hour worked and the level of technology.

The type of inflation that is a greater problem to society is

unanticipated inflation, since it causes greater redistribution of income between those making payments and those awaiting payments in the future.

Nominal incomes generally increase with inflation because

when inflation is anticipated, average nominal incomes also increase by the same percentage as the rate of inflation.