Economics Ch 24

The CPI measures approximately the same economic phenomenon as

The GDP deflator

If the CPI is 200 in year 1980 and 300 today, then $600 in 1980 has the same purchasing power as ________ today.

$900

You deposit $2,000 in a savings account, and a year later you have $2,100. Meanwhile, the consumer price index rises from 200 to 204. In this case, the nominal interest rate is _____ percent, and the real interest rate is _____ percent.

5, 3 The nominal interest rate measures the change in dollar amounts, so an increase from $2,000 to $2,100 represents a nominal interest rate of , or 5%. The increase in CPI from 200 to 204 reflects 2% inflation; therefore, the real interest rate (equal to the nominal interest rate minus the inflation rate) is equal to.

If the nominal interest rate is 4 percent and the real interest rate is -2.5 percent, then the inflation rate is

6.5 percent

If the nominal interest rate is 5 percent and the rate of inflation is 2-5 percent, then the real interest rate is

7.5%

Like the CPI, the _____ measures the overall level of prices in the economy.

GDP deflator

Imported goods affect the _____ but not the ______

Affect the CPI, but not the GDP deflator

Calculate CPI and inflation rate. Base year is 2002 and basket of goods cost $1,200. Same basket of goods in 2004 costs $1,236. Find CPI and percent change.

CPI = ($1,236/$1,200) x 100 = 103. Price increased 3 percent between 2002 and 2004

Which of the following agencies calculates the CPI?

Bureau of Labor Statistics

Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Bob withdraws his $105. If deflation was 5 percent during the year the money was deposited, then Bob's purchasing power has not changed.

False

In a period of inflation real interest rates will be greater than nominal interest rates

False

The PPI is a price index that measures the cost to consumers of a typical basket of goods sold by firms

False

The largest sector in the consumer price index market basket is good and beverage?

False

The largest component in the basket of goods and services used to compute the CPI is

Housing

Dollar figures from different times do not represent a valid comparison of purchasing power. To compare a dollar figure from the past and the present, the older figure should be ______ using a price index.

Inflated

The percentage change in the CPI measures the ______?

Inflation rate

If the price of imported French wine rises, is the consumer price index or the GDP deflator affected more? Why?

It would affect the CPI more because French wine is not produced domestically and is therefore not included in GDP.

Three problems that make the CPI an imperfect measure of the cost of living

Substitution bias as people substitute towards goods that have become relatively less expensive, introduction of new goods, unmeasured quality change.

The CPI and GDP deflator do what if Starbucks raises the price of Coffee?

The CPI and GDP deflator both rise

What does the CPI and GDP deflator do when Armani raises the price of the Italian jeans it sells in the US?

The CPI rises, the GDP deflator does not

The CPI and GDP deflator do what when Caterpillar raises the the price of the industrial tractors it manufacturers at its Illinois factory?

The GDP deflator rises, the CPI does not

In general, if a consumer good is produced domestically and consumed domestically, an increase in its price will have which of the following effects?

The consumer price index will increase relatively more than will the GDP deflator.

producer price index

a measure of the cost of a basket of goods and services bought by firms

Core CPI

a measure of the overall cost of consumer goods and services excluding food and energy

Consumer Price Index (CPI)

a measure of the overall cost of the goods and services bought by a typical consumer

Because consumers can sometimes substitute cheaper goods for those that have risen in price,

the CPI overstates inflation

If a Pennsylvania gun manufacturer raises the price of rifles it sells to the U.S. Army, its price hikes will increase

the GDP deflator but not the CPI

Indexation

the automatic correction by law or contract of a dollar amount for the effects of inflation

nominal interest rate

the interest rate as usually reported without a correction for the effects of inflation

real interest rate

the interest rate corrected for the effects of inflation

inflation rate

the percentage change in the price index from the preceding period