Macro - 3.3 Practices

Inflation_______ the purchasing power of money

decreases

chaining is used to determine

real GDP

how to calculate real price

same as real wage

in a year when the price level is 125, Charlie earns a nominal wage of $50,000. what is his real wage?

$40,000

some of the problems with using the CPI to measure inflation include:

*-*the market basket for 1999 includes some items not in the market basket for 1982 *-*the market basket for 1982 includes some items not in the market basket for 1999 *-*the CPI doesn't account for quality changes in the goods that it includes *-*substitution bias

a problem with hyperinflation is

*-*wages are paid daily *-*workers rush to turn wages into purchases *-*loans aren't made *-*money loses its purchasing power

we use the ______ to determine the purchasing power of income

CPI

what happens when the rate of time preference for consumers rises?

the demand curve shifts to the right

inflation measures

the percentage change in the CPI from one year to another

why do bonds with a B or C rating have a higher interest rate than bonds with a AAA rating?

they carry a greater risk of default

how to calculate price level?

total cost of base year total cost of year ------------------------- * ------------------- base year x *then solve algebraically*

the current base year for the CPI is

1982

a lender makes a one-year loan of 100$ with a nominal rate of 7%. if there's a 9% inflation rate, what is the real value of repayment?

98

what happens when households expect the inflation rate to increase in the future?

the demand curve shifts to the right

the bank for the United States government is:

U.S. Treasury

a mutual fund

spreads risk among many people

most investment in capital goods is done by

the business sector

how to calculate real value of payment

real interest rate * loan price --> subtract answer from loan price

which of these happens when there's a decrease in the risk of default? *Ans*: interest rates decrease

which of these happens when there's a decrease in the risk of default? *-*interest rates decrease *-*the supply of credit decreases *-*the demand for credit decreases *-*the quantity of borrowing decreases

which of these happens when there's decreasing uncertainty among firms about the future? *Ans*: the quantity of borrowing increases

which of these happens when there's decreasing uncertainty among firms about the future? *-*the quantity of borrowing increases *-*the demand curve shifts to the left *-*interest rates increase *-*the supply curve shifts to the left

which of these is a component of the interest rate on a 10-year inflation-indexed U.S. government bond? *Ans*: positive rate of time preference

which of these is a component of the interest rate on a 10-year inflation-indexed U.S. government bond? *-*expected inflation rate *-*positive rate of time preference *-*general uncertainty about the future *-*risk that the borrower will default

which of these is a component of the relatively low interest rate on a three month U.S. government bond? *Ans*: expected inflation rate

which of these is a component of the relatively low interest rate on a three month U.S. government bond? *-*general uncertainty about the future *-*high risk that the borrower will default *-*expected inflation rate *-*transaction costs of screening and monitoring borrowers

which of these is not a component of the interest rate on a 30-year U.S. government bond? *Ans*: transaction costs of screening and monitoring borrowers

which of these is not a component of the interest rate on a 30-year U.S. government bond? *-*expected inflation rate *-*transaction costs of screening and monitoring borrowers *-*general uncertainty about the future *-*positive rate of time preference

which of these would result in cost-push inflation? *Ans*: an increase in oil prices

which of these would result in cost-push inflation? *-*an increase in the standard of living *-*and influx of wealthy immigrants *-*an increase in oil prices *-*a cut in personal income taxes

why might tax cuts result in demand-pull inflation?

with more money to spend because of lower taxes, consumer demand will increase

how to calculate inflation rate

year (b) - year (a) ------------------- * 100 year(a)

how to calc total cost

add all prices together with quantity

why is the interest rate on a credit card generally much higher than government bond interest rates?

all five of the interest rate components apply to credit card debt

what happens when firms are more optimistic about future prospects?

interest rates increase

higher interest rates cause firms to:

invest in fewer capital goods

if inflation is _____ than expected, _______ is worse off

lower; borrower

even if inflation is correctly anticipated, costs due to inflation are still incurred. one such cost is called a:

menu cost

if there has been inflation since the base year, then the CPI is now:

more than 100

how to calculate real wage

nominal wage ---------------- * 100 price level

one reason the government doesn't attempt to correct the apparent problems with measuring the CPI is:

people with income adjustments based on the CPI would lose money