Economics Chapter 9

In Fairwind Country, there are only 4 consumer goods or services: tourism, popcorn, carrots, and berries. Using the data in the following table, please calculate the CPI values for 2005 and 2015, using 1985 as a base year. The average family purchased the market basket indicated by the columns "Items" and "Quantity."

2005: 128; 2015: 176

David's pay last year was $100,000. His pay this year increased to $115,000. The consumer price index increased from 100 to 115 over the same time period. What has happened to David's real income from last year to this year?

David's real income is unchanged

Which of the following BEST fits the definition of inflation?

The price of most goods and services increases by 5% and over a 2 year period

Why does Inflation increase uncertainty in the markets?

because it is harder to stay aware of how one product cost compares to another

The prices of which of the following items are included in the GDP deflator?

consumption, investment, government expenditures plus exports minus imports

Which of the following is included in the core inflation index calculation?

housing prices

Which of the following BEST describes the effect inflation has on purchasing power in the United States over the past several decades?

$100 today has the same purchasing power as $15 in 1972

The Department of Economic Health in the country of Cavia has calculated the price index for a basket of goods from 2014 to 2018. January 2014 is the standardized price index (at 100) for a basket of consumer goods. The price index increased in 2015 to 105.7, in 2016 to 108.6, in 2017 to 115.9, and in 2018 it increased to 120.4. What are the yearly inflation rates in Cavia for 2015, 2016, 2017, and 2018?

2015: 5.7%, 2016: 2.7%, 2017: 6.7%; 2018: 3.9%

With a Consumer Price Index of 179.8 at the end of last year and 186.5 at the end of this year, the country experienced which of the following?

An inflation rate of 3.72 percent

In the base year in a small island macroeconomy, nominal GDP was $400m. In a later year when the general level of all prices was twice as high, nominal GDP reached $1000m. Between the base year and the later year:

inflation occurred

Under ideal conditions inflation should not have any blurring effect on price signals. If wages and prices are rising at a constant 20% then individuals should be able to adjust their expectations accordingly. For example, if the price of bread increased by 20% and the price of the input flour also rose by 20%, the sellers should know that the real price of bread has not changed. The market equilibrium quantity and price has not changed. Why does inflation in the real world result in shortages and surpluses?

price adjustments are not synchronized or smooth

Henry accepted a new position at a ball bearing manufacturing plant after graduation from college. With his macroeconomic education, Henry has been asked to advise the best way to measure inflation for the company to be able to accurately adjust its prices. What would Henry advise the company use?

producer price index

The mid-1990s saw a rise in the use of mobile phones in the general population. The technology continued to improve in the early 2000s and in the mid-2000s smartphones revolutionized the way people communicated. The technology has changed very rapidly and improved the lives of consumers. With these rapid changes, what would you suspect has happened to the CPI calculation?

the CPI has overstated the cost of living because of quality improvement bias.

Inflation makes certain things less valuable in real terms, including:

the dollar

Which of the following inflation rates is most likely to affect consumer behavior?

15%

The base year for the price index is

an arbitrary year from which to measure price changes

This past year inflation in Snowdonia has increased to 150%. As an economic analyst, you are charged with identifying those sectors of the population worst affected by this inflation event. Which group of people is likely to be worst affected by inflation?

disabled veterans living on fixed (non-adjustable) government transfer payments

After a prolonged period of high inflation the government of Atlantia decides to set a target of 0% inflation going forward. As the new assistant economic minister, you are tasked with critiquing this policy. Which criticism of the 0% inflation target is best supported by the economic literature?

a 0% inflation target could lead to deflation

In the last few decades the car manufacturing sector has found it difficult to compete with foreign car imports. High labor costs is one of the main reasons economist site as the lack of competitiveness for the car manufacturing industry. If there was modest inflation, how could it possibly help the car manufacturing industry in the United States compete with foreign car manufacturers?

it could allow real wages downwardly adjust more easily

You have older parents who have been saving for retirement for decades. They are now getting close to retirement age and are looking at their options. One would like to leave everything in the pension fund and draw out a fixed, unchangeable amount over their retirement time. Your other parent wants to take out a chunk of retirement funds and purchase a business and use the profit from it to generate funds on which to live. You have noticed that inflation over the last year is on a rapid rise. What would you advise your parents to do based on what you know of inflation and its redistribution of purchasing power?

you would advise them to buy a business with their retirement funds and keep their money working for them to keep up with inflation