econ ch 16 inflation measurement and adjusment
Assume that the marginal propensity to consume is 0.9. What is the maximum amount that real GDP could change if government expenditures increase by $1 billion?
$10 billion
Assume that the marginal propensity to save is 0.1. What is the maximum amount that real GDP could change if net exports increase by $15 billion?
$150 billion
If the nominal GDP is $5 trillion in year 1, and the real GDP is $4.5 trillion, what is the GDP deflator?
$5 trillion / $4.5 trillion = around 1.111
If $100 of new private investment gets added to the economy, and the marginal propensity to consume is 0.80, by how much will aggregate demand increase?
$500
What is the formula needed to calculate real GDP growth rate?
(Real GDP in year 2 / Real GDP in year 1) -1
What is the real interest rate when the nominal interest rate on a bank checking account is 1%, and the rate of inflation is 2%?
-1%
A small island country had a seven percent increase in its money supply from the prior year and a three percent increase in real GDP. Calculate the change in the price level.
4%
Which one of these scenarios would cause Cost-Push Inflation?
A decrease in aggregate supply resulting in higher prices
How is a person's likelihood to save related to the simple spending multiplier?
A decrease in the marginal propensity to save will increase the multiplier.
What is the result of cost-push inflation?
A higher equilibrium price and lower economic output.
What happens when actual inflation is higher than expected inflation?
A redistribution of wealth takes place between savers to borrowers
Demand-Pull Inflation is illustrated by which of the following?
A rightward shift of the aggregate demand curve
The Substitution Bias is which of the following?
A weakness in the Consumer Price Index (CPI)
Last year, the Consumer Price Index (CPI) was 120, and Bob's household earned $80,000. Assuming this year's CPI is 130, what would Bob's household need to earn in order to have the same purchasing power as last year?
About $87,000
In year one, a worker's nominal wage is $25,000, and the CPI is 100. The following year, the worker's nominal wages stay the same, but the CPI is 105. In order to calculate the worker's real wage in year two, what needs to be done?
Adjust the nominal wage by inflation
In year one, nominal GDP is $5,000, while real GDP is $4,500. In year two, nominal GDP is $5,500, while real GDP is $4,800. What was the growth rate of real GDP between years one and two?
Around 7%
How do economists illustrate stagflation?
As a decrease in the short-run aggregate supply curve.
How does the multiplier effect resemble a ripple effect through the economy?
As people spend most of their earnings, money flows through the economy one person at a time.
Why does the Substitution Bias occur?
Because consumers are willing to substitute a cheaper good for another good that is more expensive
Melissa has a choice between two jobs. The first is a job is in New York City with a salary of $90,000. The other job has a salary of $80,000 per year salary in Boise, Idaho. Let's assume that the CPI is 120 in New York, while the CPI is 100 in Boise. If Melissa wants to maximize her 'real wage', which job should she choose?
Boise, because the real wage is $5,000 higher than the real wage in New York.
What does the Consumer Price Index measure?
Changes in the price level of an economy
Which of the following groups of people will benefit from unexpected inflation?
Debtors
Susie lives in Arkansas and she is in the market for a new car just released by XYZ Car Company. Susie is finding out that the car is in very high demand, and she has seen the price on the car rise twice since she started shopping around. Alan lives in California and he is in the market for the new tablet released by ABC Electronics. Alan is finding out the tablet is hard to get a hold of because it is in such high demand, and the price keeps rising on the tablet at all the retailers Alan is visiting. Rachel lives in New York and she is the market for new leather jacket put out by her favorite clothing line. Rachel is realizing that this is the case for many in New York and so the cost keeps increasing for this leather jacket she wants. What is the above scenario an example of?
Demand-Pull Inflation
When aggregate demand increases faster than aggregate supply, prices go up. What is this an example of?
Demand-pull inflation
Which of the following statements is FALSE regarding inflation?
During the 1970s, it was extremely low.
Which of the following is considered the best measure of changes in prices by economists?
GDP deflator
Which of the following is a cause of Cost-Push Inflation?
Increases in the costs to produce
A retired woman lives entirely on Social Security income, while a farmer borrows money to buy a new tractor. How would inflation affect them?
Inflation helps the farmer but hurts the retiree
What is the major drawback of using nominal GDP to measure the economic output of a nation?
It creates a false impression of the amount of output taking place from one year to the next because of the change in prices.
Last year, an assembly-line worker earned $10 per hour when the Consumer Price Index (CPI) was 100. This year, the same worker earned $12 per hour, but the CPI has increased to 125. What happened to the worker's real wage?
It decreased.
Why is the GDP deflator considered superior to the consumer price index?
It is not based on a fixed basket of goods.
Which of the following statements is FALSE regarding the Substitution Bias?
It leads to an understatement of inflation.
What is the benefit of using Real GDP?
It removes the effect of rising prices.
What is the value of using real GDP?
It removes the effects of rising prices.
Nominal GDP in year one was $16,000, while nominal GDP in year two was $19,320. Real GDP was $16,000 in year one and $15,500 in year two. What does this indicate about the economy?
It was in recession.
Which of the following is the correct formulation of the equation of exchange?
M x V = P x Y
How is nominal GDP calculated?
Multiplying price x quantity in the same year for every good and finding the total.
How is real GDP calculated?
Multiplying the quantity x the price in a base year.
In year one, nominal GDP is $5,000, while real GDP is $4,500. In year two, nominal GDP is $5,500, while real GDP is $4,800. Which of the following statements is TRUE?
Nominal GDP increased more than real GDP.
When economists want to measure current production of an economy at current prices, they use which of the following?
Nominal gross domestic product
Using the chart below, which statement is true regarding wages over the three year period?
Nominal wages rose, while real wages stayed the same.
The Consumer Price Index (CPI) is based on a fixed basket of goods that the average citizen buys. The Substitution Bias causes this index to do which of the following?
Overstate the level of inflation
Which of the following would be negatively affected from unanticipated inflation?
People that own investments that pay a fixed rate of interest, such as bonds
If Mary's nominal income rises by 4%, while her real income fell by 2%, what happens to the level of prices?
Prices increase by 6%.
If nominal GDP increased by 5.1% and real GDP increased by 2.5% last year, which of the following is TRUE?
Prices went up during the year.
What are the two reasons that economic output can increase?
Quantity increased and prices increased.
What occurs when the rate of unemployment goes up at the same time as inflation?
Stagflation
What happens if the rate of inflation as reported by the Consumer Price Index is 3%?
The actual rate of inflation may be lower because of the Substitution Effect.
If the Consumer Price Index rises from 101 to 104, which of the following statements is true?
The average level of prices for a fixed basket of goods and services rises by 2.97%
Why might a national wheat plague cause cost-push inflation?
The lack of wheat will make common items more expensive.
If the rate of economic output, measured in real GDP, outpaces the rate of change in the money supply, then how is the price level affected?
The price level will decrease.
If the consumer price index is equal to 100 in year 1, and 103 in year 2, what does this mean?
The prices have risen by 3 percent.
According to the equation of exchange, which of the following usually has the largest impact on inflation?
The rate in change of the money supply
What does the GDP deflator represent?
The ratio of the nominal GDP to the real GDP
What is the nominal gross domestic product?
The total market value of goods and services produced, measured in current dollars.
Why do economists use real GDP?
Using nominal GDP can create a false impression of the amount of output happening in the economy from one year to another.
Real GDP evaluates _____ production at _____ prices.
current; past
Cost-push inflation occurs when _____.
higher production costs push up prices
Unexpectedly high inflation _____ savers and _____ borrowers.
hurts; helps
The rate at which money is moved around an economy is known as the _____.
velocity of money
