EC 205: Problem Set 5 (Chapters 15/16)

A small nation produces and consumes only cookies and milk. Assuming that the average market basket of goods contains 1 box of cookies and 3 containers of milk, calculate the CPI for Year 2. Assume Year 1 is the base year. Year Price of Box of Cookies Price of Container of Milk Year 1 $40 $10 Year 2 $60 $12 The value of the CPI in Year 2 is ______, and the annual rate of inflation (annual percentage increase in CPI) in Year 2 is _______. Select one: a. 137.14, 37.14% b. 188, 88% c. 176, 76% d. 500, 5%

a. 137.14, 37.14%

Which most likely has a greater effect on the U.S. CPI: a 10% increase in the price of chicken or a 10% increase in the price of caviar? Why? Select one: a. a 10% increase in the price of chicken since chicken would be a greater component of the average consumer's market basket b. a 10% increase in the price of chicken since chicken has a more inelastic demand c. a 10% increase in the price of chicken since chicken is relatively inexpensive compared to caviar d. a 10% increase in the price of caviar since caviar is relatively expensive compared to chicken

a. a 10% increase in the price of chicken since chicken would be a greater component of the average consumer's market basket

Because consumers can sometimes substitute cheaper goods for those that have risen in price, Select one: a. the CPI can slightly overvalue inflation b. the CPI can slightly undervalue inflation c. the GDP deflator can slightly overvalue inflation d. the GDP deflator can slightly undervalue deflation

a. the CPI can slightly overvalue inflation

Consider an economy that produces only chocolate bars. In year 1, the quantity produced is 3 bars and the price is $4. In year 2, the quantity produced is 4 bars and the price is $5. In year 3, the quantity produced is 5 bars and the price is $6. Year 1 is the base year. What is nominal GDP for year 1, year 2, year 3? Select one: a. $4, $5, $6 b. $12, $20, $30 c. $12, $16, $20 d. $15, $20, $25

b. $12, $20, $30

Consider an economy that produces only chocolate bars. In year 1, the quantity produced is 3 bars and the price is $4. In year 2, the quantity produced is 4 bars and the price is $5. In year 3, the quantity produced is 5 bars and the price is $6. Year 1 is the base year. What is real GDP for year 1, year 2, year 3? Select one: a. $4, $5, $6 b. $12, $20, $30 c. $12, $16, $20 d. $15, $20, $25

c. $12, $16, $20

Suppose your bank pays you a nominal interest rate of 2% on your savings. If the current rate of inflation is 1%, what is the rate of real interest you earn on your savings? Select one: a. - 1% b. 0% c. 1% d. 2%

c. 1%

Consider an economy that produces only chocolate bars. In year 1, the quantity produced is 3 bars and the price is $4. In year 2, the quantity produced is 4 bars and the price is $5. In year 3, the quantity produced is 5 bars and the price is $6. Year 1 is the base year. What is the GDP Deflator for year 1, year 2, year 3? Select one: a. 4, 5, 6 b. 400, 500, 600 c. 100, 125, 150 d. 100, 400, 500

c. 100, 125, 150

Suppose Ford, an American automobile producer, opens a plant in Canada. Which of the following is true? Select one: a. The cars Ford produces at the Canadian plant are a part of U.S. GNP b. The cars Ford produces at the Canadian plant are a part of Canadian GDP c. Both of the above are true d. Neither of the above are true

c. Both of the above are true

Suppose you are a U.S. citizen living in North Carolina, and you purchase a Maserati produced in Italy. How does your purchase affect U.S. GDP? Select one: a. U.S. GDP will increase b. U.S. GDP will decrease c. U.S. GDP will be unchanged d. all of the above

c. U.S. GDP will be unchanged

Suppose you take a job today in the financial industry earning an annual salary of $90,000. Also suppose your mom had that same job in the year 2000, earning $60,000 per year. If the CPI was 200 in the year 2000, and today's CPI is 300, which of the following is true? Select one: a. in real terms, your salary today is higher than your mom's 2000 salary b. in real terms, your salary today is lower than your mom's 2000 salary c. in real terms, your salary today is equal to your mom's 2000 salary d. none of the above

c. in real terms, your salary today is equal to your mom's 2000 salary

A small nation produces and consumes only cookies and milk. In Year 1, the nation consumes 10 units of cookies at $40 apiece, and 30 units of milk at $10 apiece. In Year 2, the nation consumes 12 units of cookies at $60 apiece, and 50 units of milk at $12 apiece. Assume Year 1 is the base year. The value of the GDP deflator in Year 2 is ______, and the annual rate of inflation (annual percentage increase in GDP deflator) in Year 2 according to the GDP deflator is _______. Select one: a. 137.14, 37.14% b. 1320, 132% c. 980, 98% d. 134.69, 34.69%

d. 134.69, 34.69%

Which economic statistic best measures well-being among nations? Select one: a. CPI b. GDP deflator c. GDP d. GDP per capita

d. GDP per capita

Which of the following is true? Select one: a. GDP = C + I + G + (exports-imports) b. GDP = C + S + T c. GDP is a measure of final goods and services produced within an economy d. all of the above

d. all of the above

Which of the following is true? Select one: a. The National Bureau of Economic Research is the agency which reports real GDP and when the economy is in an official recession b. The Bureau of Labor Statistics is the agency which reports the CPI and the inflation rate c. a recessionary economy is one where real GDP is declining d. all of the above

d. all of the above

If the price of imported French wine rises, is the CPI or GDP deflator in the U.S. affected more? Why? Select one: a. the GDP deflator since consumers may not drink imported wine b. the GDP deflator since it is a part of net exports c. the GDP deflator since it is a part of investment spending d. the CPI since it would not be a part of the GDP deflator- imported goods are not included in GDP

d. the CPI since it would not be a part of the GDP deflator- imported goods are not included in GDP