Homework #4 - Econ 202 Ch.9

Suppose that Apple and the investors buying the​ firm's bonds both expect a 3 percent inflation rate for the year. ​Further, suppose the nominal interest rate on bonds is 6 percent and the expected real interest rate is 3 percent. Part 2 Now suppose that a year after the investors purchase the​ bonds, the inflation rate turns out to be 2 ​percent, rather than the 3 percent that had been expected. Part 3 In this​ situation, investors___ and borrowers ____ .

-Investors win -Borrowers lose

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 deflationLOADING... was often a subject of their protests. Part 2 Why would farmers have felt burdened by deflation during this​ period? Part 3 A. During deflationary​ periods, the real interest rate exceeds the nominal interest​ rate, and the real cost of borrowing increases. B. During deflationary​ periods, the nominal interest rate exceeds the real interest​ rate, and the real cost of borrowing increases. C. During deflationary​ periods, the real interest rate exceeds the nominal interest​ rate, and the real cost of borrowing falls. D. During deflationary​ periods, the nominal interest rate exceeds the real interest​ rate, and the real cost of borrowing falls.

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

Computation of the CPI assumes that households buy the same market basket of products each month. For this​ reason, which one of the following factors is not relevant in calculating the​ CPI? A. the quantities of the products households purchase in the current year B. the quantities of the products households purchase in the base year C. the prices of the products households purchase in the current year D. the prices of the products households purchase in the base year

A. the quantities of the products households purchase in the current year

In​ 2018, the government of Venezuela raised the minimum wage by​ 5,900 percent, but an article in the Economist quoted one Venezuelan as saying that on his wages as a building​ worker, "you go a day and half a week without​ eating." He was able to buy far less with his higher wages than he had been able to buy with his wages a few years before. ​Source: "Having Wrecked the​ Economy, Venezuela's Rulers See No Reason to​ Change," Economist​, December​ 13, 2018. Why would the minimum wage in Venezuela buy so little despite having been raised by so​ much? A. The wage increase would not be enough to offset the redistribution of income that occurred during the hyperinflation. B. Even though their wages were increasing by​ 5,900 percent, prices were increasing by more. Your answer is correct. C. They would not be able to spend the extra money and instead need to hold as much paper money as possible. D. With the extra purchasing power from the wage​ increase, prices would fall and they would experience deflationary conditions.

B. Even though their wages were increasing by​ 5,900 percent, prices were increasing by more.

Which of the following can give an early warning of future increases in the price​ level? Part 2 A. GDP deflator B. Producer price index C. Consumer price index D. All of the above

B. Producer price index

Which of the following steps has not been taken by the Bureau of Labor Statistics​ (BLS) to reduce the size of the biases in the​ CPI? A. The BLS has reduced the size of the outlet bias by conducting a​ point-of-purchase survey to track where consumers make their purchases. B. The BLS has expanded the number of stores from which it collects the price information to reduce the coverage bias. Your answer is correct. C. The BLS has reduced the size of the substitution bias and the new product bias by updating the market basket every two years instead of every ten years. D. The BLS has used statistical methods to reduce the size of the quality bias.

B. The BLS has expanded the number of stores from which it collects the price information to reduce the coverage bias.

b. If the new iPhone models had had the same prices as the iPhone models of the previous​ year, how would the introduction of the new iPhone models have affected the​ CPI? A. The CPI would have increased. B. The CPI would have decreased. C. The CPI would not have changed.

B. The CPI would have decreased. -Until the BLS updates the market basket of goods used to compute the CPI to include the new iPhone​ models, the introduction of the new iPhones will have no effect on the CPI.

Since​ 2013, Japan has been struggling to raise the​ country's inflation rate from about 0 percent to 2 percent. According to an article in the Wall Street Journal​, Japan aimed to raise its inflation rate to 2 percent to​ "bring Japan out of a negative spiral of falling​ prices, sluggish wages and weak​ consumption." ​Source: Megumi​ Fujikawa, "Japan Finally Concedes Its Crazy Low Prices​ Can't Be​ Beat," Wall Street Journal​, December​ 21, 2018. Briefly explain why ending a period of falling prices might result in higher consumer and firm spending. A. Nominal incomes generally increase with inflation so consumers will be able to buy more with their income. B. It can result in higher spending only if the inflation is unanticipated and consumers and firms​ don't see it coming. C. Buyers will buy more now if they believe that inflation will follow a period of falling prices. D. It's not possible for spending to increase with a rising price​ level; this is bad news for consumers and firms.

C. Buyers will buy more now if they believe that inflation will follow a period of falling prices.

Briefly explain whether you agree or disagree with the following​ statement: ​"I don't believe the government price statistics. The CPI for 2018 was 212​, but I know that the inflation rate.. ​couldn't have been as high as 112 percent in​ 2018." Part 2 A. Disagree. The inflation rate is always the same as the natural rate of​ unemployment, which is about​ 5%. B. Agree. A CPI of 212 is a 112​% increase from​ 100, which is impossible. C. Disagree. The inflation rate is the percentage increase in the price level from the previous​ year, not the base year. D. Agree. A CPI of 212 is a 112​% increase in the price level from the base year. The inflation rate in 2018 is 112​%.

C. Disagree. The inflation rate is the percentage increase in the price level from the previous​ year, not the base year.

The difference between a nominal variable and a real variable is that Part 2 A. real variables are divided by the price index and multiplied by 100 to obtain nominal variables. B. real variables are calculated in​ current-year prices and the nominal variables are measured in dollars of the base year to adjust for the effects of inflation. C. nominal variables are calculated in​ current-year prices and the real variables are measured in dollars of the base year for the price index to correct the effects of inflation. Your answer is correct. D. nominal variables are economic variables that are adjusted for​ inflation, whereas real variables are valued in​ today's dollars.

C. nominal variables are calculated in​ current-year prices and the real variables are measured in dollars of the base year for the price index to correct the effects of inflation.

Menu costs are Part 2 A. the costs of fixed inputs in the short run. B. the same as sunk costs. C. the costs to firms of changing prices. D. the costs of variable inputs in the long run. Part 3 The Internet has _______ the size of menu costs.

C. the costs to firms of changing prices. -Reduced

Which of the following causes changes in the CPI to overstate the true inflation​ rate? Part 2 A. Increase in quality bias B. New product bias C. Substitution bias D. All of the above

D. All of the above

Even perfectly anticipated inflation imposes costs.​ Why? Part 2 A. Some wages will fail to keep up with anticipated inflation. B. Menu costs. C. Paper money loses its purchasing power by the rate of inflation. D. All of the above. E. A and C only.

D. All of the above.

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 because the consumption of ice cream is more constant over time. 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 since it is more representative of a typical market basket for a family of four. D. Ice cream would be more important if consumers spent a higher fraction of their budgets on ice cream than on bacon.

D. Ice cream would be more important if consumers spent a higher fraction of their budgets on ice cream than on bacon.

An article in the Wall Street Journal asks the​ question, "How can inflation be low when everything is so​ expensive?" The article also notes that​ "the CPI shows that prices are the highest​ they've ever​ been." Source​: Josh​ Zumbrun, "5 Things You Always Wanted to Know about Inflation​ Statistics," Wall Street Journal​, May​ 15, 2014. Part 2 Is there a contradiction between a low inflation rate as measured by the CPI and the observations that prices are​ "the highest​ they've ever​ been" and everything is​ "so expensive"? A. No, because​ inflation, even if it is​ low, indicates that goods and services are expensive. B. Yes, because goods and services are more​ expensive, the higher is the CPI. C. Yes, because inflation is supposed to measure changes in the cost of living. D. No, because the CPI and inflation measure only changes in the price​ level, not the absolute level of prices.

D. No, because the CPI and inflation measure only changes in the price​ level, not the absolute level of prices.

Albanda is an agrarian economy located in South Asia. Shen Chou and her friend Wang Tao are discussing the efficacy of the Consumer Price Index.​ Shen, who works with a nonprofit​ organization, says that the Consumer Price Index does not reflect the realities of consumption patterns of the average consumer.​ Wang, a policy​ planner, says that it must be accurate because it was updated only a year ago. Which of the​ following, if​ true, would strengthen​ Shen's argument? A. The regulatory body of the country revises the components and weightages of the CPI once in two years. B. Price levels in the economy remained high during the year because of increasing aggregate demand. C. The producer price index​ (PPI) has increased by 2 percent during the year when the actual cost of living in the country moved up by 1.5 percent. D. Pensioners whose benefit payments are directly linked to the changes in CPI reported a decreased purchasing power compared to the previous year. Your answer is correct. E. The currency of the country strengthened by 4 percent during the year.

D. Pensioners whose benefit payments are directly linked to the changes in CPI reported a decreased purchasing power compared to the previous year.

In September​ 2018, Apple introduced three new models of its iPhone. The new models had faster processors and better cameras than the models they​ replaced, and they sold for higher prices. Part 2 a. Because the new iPhone models replaced the older models in the basket of goods used to calculate the​ CPI, how did the higher prices of the new iPhones affect the​ CPI? A. The CPI decreases due to the new product bias. B. The CPI increases due to the decrease in quality bias. C. The CPI increases due to the substitution bias. D. The CPI does not change.

D. The CPI does not change. -

The central bank of the country Iberia recently announced a reduction in the interest rate by 150 basis points. Following this​ announcement, Matthew​ Boulder, who is interested in buying a​ house, expects the real interest rates also to fall.​ However, he notices that the real interest rate in the economy has actually increased. Which of the following is most likely to explain this​ outcome? A. The minimum wage in Iberia remained the same as in the previous year. B. Housing prices in Iberia have been increasing for the past 3 years. C. The central bank announced that it expects the economy to grow rapidly in the next few quarters. D. The Iberian economy is going through a period of deflation. E. The unemployment rate fell sharply in the current year as compared to the last year.

D. The Iberian economy is going through a period of deflation.

Suppose that the inflation rate turns out to be much lower than most people expected. In that​ case, Part 2 A. a lender will lose from the situation while a borrower will gain. B. both borrower and lender will gain from the situation. C. both borrower and lender will lose in this situation. D. a borrower will lose from the situation while a lender will gain.

D. a borrower will lose from the situation while a lender will gain.

To have no substitution​ bias, what shape would the demand curve need to be for the products in the market​ basket?

Vertical

The type of inflation that is a greater problem to society is Part 2 A. unanticipated​ inflation, since it has some costs associated with​ it, such as menu costs. B. anticipated inflation because the purchasing power of the dollar falls very rapidly. C. unanticipated​ inflation, since it causes greater redistribution of income between those making payments and those awaiting payments in the future. D. anticipated​ inflation, since people have to pay taxes on the higher nominal income even though the real income has not changed.

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