MACRO ECON 202 HW 4 (myeconlab)
Which of the following can give an early warning of future increases in the price level?
Producer price index
The producer price index (PPI) tracks the prices firms receive for goods and services at all stages of production.
True
Which of the following causes changes in the CPI to overstate the true inflation rate?
All of the above - Increase in quality bias - New product bias - Substitution bias
Suppose that the inflation rate turns out to be much higher than most people expected. In that case,
a borrower will gain from the situation while a lender will lose.
An article in the Wall Street Journal notes that the BLS has changed the methods it uses to calculate the CPI with the result that the measured inflation rate is lower than it would have been if the BLS had still used the old methods. The article notes, "But this is not a massive conspiracy to hide runaway inflation." Source: Josh Zumbrun, "5 Things You Always Wanted to Know about Inflation Statistics," Wall Street Journal, May 15, 2014. The BLS's motivation in changing its methods of calculating the CPI was to
reduce biases thereby allowing for a more accurate measure of the true inflation rate.
The Internet has _____ the size of menu costs.
reduced
The real interest rate equals
the nominal interest rate minus the inflation rate.
If inflation is expected to increase,
the nominal interest rate will increase.
Price indexes can be used to compare prices across different periods. Suppose that a year of tuition for college at public institutions averaged a cost of $1 comma 874 in 1989 and that the CPI index was 112 in 1989. If the CPI index was 228 in 2009, then the cost of tuition in 2009, as the result of inflation, would equal $____. Suppose that the actual average cost of tuition in 2009 was $6,814. Relative to the expected cost computed above, the cost of tuition increased by ___ the amount of inflation.
$3815 more than
The price index which is used to measure changes in the cost of living is the
Consumer Price Index (CPI).
If income rises more slowly than the rate of inflation, purchasing power will rise.
False
The movie that earned the most in real terms is ____.
Gone with the Wind
Indicate whether the following statement is true or false and why. "A wage rising slower than the rate of inflation is actually falling."
True. If wages are increasing slower than the average price of goods and services, purchasing power falls.
What index is used to measure the average prices paid by a typical family? An average of the prices of the goods and services purchased by a typical family is the:
consumer price index (CPI).
All of the following are problems caused by deflation except
firms make higher profits as consumers buy more goods and services.
If the economy is experiencing deflation,
the nominal interest rate will be lower than the real interest rate.
Complete the following table: Base Year 2014 2016 Product Quantity Price Expenditures Price Expenditures Price Expenditures Denim Jeans 1 $60 $60 $120 $120 $95 $95 Pizzas 20 12 240 18 360 16 320 Coffee Drinks 20 5 100 5 100 6 120 Total $__ $__ $__ The CPI in 2014 equals ___. The CPI in 2016 equals ___.
$400 $580 $535 145 133.75
In 1924, the famous novelist F. Scott Fitzgerald wrote an article for the Saturday Evening Post titled "How to live on $36,000 a Year," in which he wondered how he and his wife had managed to spend all of that very high income without saving any of it. In 1924, the consumer price index (CPI) was 17, and the CPI in 2012 was 230. Source: F. Scott Fitzgerald, "How to live on $36,000 a Year," Saturday Evening Post, April 5, 1924. The income you would have needed in 2012 to have had the same purchasing power that Fitzgerald's $36,000 had in 1924 is $___.
$487,059
Consider the following table: Year Nominal Average Hourly Earnings CPI 2008 $16.00 202 2009 $17.00 207 2010 $18.00 209 What is the real average hourly wage in 2009? What can be said about real average hourly earnings and nominal average hourly earnings between 2008 and 2010?
$8.21 Real average hourly earnings increased and nominal average hourly earnings decreased.
Suppose the consumer price index (CPI) of a country follows the path shown in the figure to the right. During which period did the country experience zero inflation? During which period did the country experience an increasing rate of inflation? During which period did the country experience a slow down in inflation, although the inflation rate remained positive? (This situation is called "disinflation.") During which period did the country experience deflation?
- 2000 to 2005 - 1990 to 1995 - 1995 to 2000 - 2005 to 2010
Suppose the fixed interest rate on a loan is 5.75% and the rate of inflation is expected to be 4.25%. The real interest rate is 1.5%. Suppose now that instead of 4.25%, the inflation rate unexpectedly reaches 5.5%. Who gains and who loses from this unanticipated inflation? (Mark all that apply.)
- Borrowers gain from a lower real interest rate. - Lenders lose from a lower real interest rate.
Use the information in the following table to determine the percentage changes in the U.S. and French real minimum wages between 1957 and 2014. United States France Year Minimum wage (dollars per hour) CPI Minimum wage (euros per hour) CPI 1957 $1.00 27 0.19 euros 8 2014 $7.25 237 9.61 euros 106 Sources: John M.Abowd, Francis Kramarz, Thomas Lemieux,and David N. Margolis, "Minimum Wages and Youth Employment in France and theUnited States," in D. Blanchflower and R. Freeman, eds., Youth Employment and Joblessness in Advanced Countries, Chicago:University of Chicago Press, 1999, pp. 427-472 (the value for the minimum wage is given in francs; it was converted to euros at a conversion rate of 1 euro = 6.55957 francs); Insee online data bank,www.insee.fr; U.S. Department of Labor; and U.S.Bureau of Labor Statistics. Calculate the percentage change in U.S. real minimum wages between 1957 and 2014: ___% Calculate the percentage change in French real minimum wages between 1957 and 2014: __% Based on the above calculations, we can conclude that ___.
-17.38% 281.13% although nominal minimum wages increased in the U.S., real minimum wages fell during this period.
Suppose you were borrowing money to buy a car. Consider the following situations. Situation 1: Suppose the interest rate on your car loan is 16.00 percent and the inflation rate is 15.00 percent. Calculate the real interest rate. ____% Situation 2: Suppose the interest rate on your car loan is 6.00 percent and the inflation rate is 3.00 percent. Calculate the real interest rate. __% Situation 1 will be ___ Situation 2 because the ___ is lower. Now suppose you are JPMorgan Chase, and you are making car loans. Which situation above would you now prefer? JPMorgan Chase would prefer ___.
1% 3% better than real interest rate situation 2
Suppose an economy has an inflation rate of 3.5% and a bank makes a loan with an interest rate of 5.9%. In this case, the real interest rate is ____%
2.4%
Suppose the economy's consumer price index (CPI) in 2008 was 189 and the CPI in 2009 was 195. The inflation rate over the period from 2008-2009 was equal to nothing __%.
3.2%
Consider the simple economy that produces only three products. Use the information in the following table to calculate the (annual rate of) inflation for 2018 as measured by the consumer price index (CPI). BASE YEAR (2010) 2017 2018 Product Quantity Price Price Price Haircuts 3 $10.00 $11.00 $16.20 Hamburgers 7 2.00 2.45 2.40 Movies 9 15.00 15.00 14.00 The inflation rate for 2018 as measured by the consumer price index (CPI) is __.
3.38%
The Standard & Poor's/Case-Shiller Home Price Index is one of the leading indicators of housing price trends in the United States. The base year for the index is January 2000. The following table lists index numbers for July 2017 and July 2018 for five cities. City July 2018 July 2017 New York 197.1 190.0 Miami 236.8 225.4 Phoenix 183.5 170.8 Dallas 185.2 176.3 San Diego 256.1 241.2 *Real-time data provided by Federal Reserve Economic Data (FRED), Federal Reserve Bank of Saint Louis. Calculate the percentage changes in the price indices from July 2017 to July 2018 for the following cities (enter all values as percentages rounded to one decimal place and include a minus sign if necessary): New York: __% Miami: __% Phoenix: __% Dallas: __% San Diego: __% The prices of homes changed the most during this year in ___. Based on these numbers, can you determine which city had the most expensive homes in July 2018?
3.7 5.1 7.4 5.0 6.2 Phoenix It is not possible to determine this with the information provided.
In an article in the Wall Street Journal, a professor of financial planning noted the effect of rising prices on purchasing power: "Today, $2,000 a month seems reasonable [as an income for a retired person in addition to the person's Social Security payments], but 40 years from now that's going to be three cups of coffee and a donut." Source: Matthias Rieker, "Rising Use of Immediate Annuities Raises Some Concerns," Wall Street Journal, December 4, 2014. Suppose that three cups of coffee and a donut could be purchased for $10 in 2014 and the CPI in 2014 was 237. If the prices of coffee and donuts increase at the same rate as the CPI over these 40 years, then for $2,000 to be able to purchase three cups of coffee and a donut in 2054, the CPI would have to be ___.
47400
The following table shows the top 10 films of all time through July 2015, measured by box office receipts in the United States, as well as several other notable films farther down the list. The CPI in 2015 was 238. Use this information and the data in the table to calculate the box office receipts for each film in 2015 dollars. Assume that each film generated all of its box office receipts during the year it was released. Use your results to prepare a new list of the top 10 films, based on their earnings in 2015 dollars. (Some of the films, such as the first Star Wars film, Gone with the Wind, and Snow White and the Seven Dwarfs, were re-released several times, so their receipts were actually earned during several different years, but we will ignore that complication.) Fill in the real value of box office receipts in the table below. (Enter your responses rounded to one decimal place.) Rank Film Total Box Office Receipts (in millions) Year Released CPI Real Value of Box Office Receipts (in millions) 1 Avatar $760.5 2009 215 ___ 2 Titanic 658.7 1997 161 ___ 3 Jurassic World 628.7 2015 238 ___ 4 Marvel's The Avengers 623.4 2012 230 ___ 5 The Dark Knight 534.9 2008 215 ___ 6 Star Wars: Episode I-The Phantom Menace 474.5 1999 167 ___ 7 Star Wars 460.9 1977 61 ___ 8 Avengers: Age of Ultron 456.8 2015 238 ___ 9 The Dark Knight Rises 448.1 2012 230 ___ 10 Shrek 2 441.2 2004 189 ___ 11 E.T.: The Extra-Terrestrial 435.1 1982 97 ___ 79 Jaws 260.0 1975 54 ___ 161 Gone with the Wind 198.7 1939 14 ___ 183 Snow White and the Seven Dwarfs 184.9 1937 14 ___ 257 The Sound of Music 158.7 1965 32 ___ 303 101 Dalmatians 144.9 1961 30 ___
841.9 973.7 628.7 645.1 592.1 676.2 1797.5 456.8 463.7 555.6 1067.6 1145.9 3377.9 3143.3 1180.3 1149.5
Even perfectly anticipated inflation imposes costs. Why?
All of the above. - Paper money loses its purchasing power by the rate of inflation. - Menu costs. - Some wages will fail to keep up with anticipated inflation.
Which of the following is not considered one of the potential biases in calculating the consumer price index?
Coverage bias.
Briefly explain whether you agree or disagree with the following statement: "I don't believe the government price statistics. The CPI for 2016 was 220, but I know that the inflation rate couldn't have been as high as 120 percent in 2016."
Disagree. The inflation rate is the percentage increase in the price level from the previous year, not the base year.
During the late nineteenth century in the United States, many farmers borrowed heavily to buy land. During most of the period between 1870 and the mid-1890s, the United States experienced mild deflation. Many farmers engaged in political protests during these years, and deflation was often a subject of their protests. Why would farmers have felt burdened by deflation during this period?
During deflationary periods, the real interest rate exceeds the nominal interest rate, and the real cost of borrowing increases.
Which of the following steps has not been taken by the Bureau of Labor Statistics (BLS) to reduce the size of the biases in the CPI?
The BLS has expanded the number of stores from which it collects the price information to reduce the coverage bias.
In the fall of 2015, Apple introduced a new model of its iPhone. The new model had a faster processor and a better camera than the previous model but sold for the same price. How was the CPI affected by the introduction of the new model of the iPhone? If Apple's new iPhones offer more features for the same price as the previous model, how was the consumer price index affected by the introduction of the new iPhone?
The CPI does not change.
What is the difference between the consumer price index and the producer price index?
The consumer price index is an average of the prices of the goods and services purchased by the typical urban family of four, whereas the producer price index is an average of the prices received by producers of goods and services at all stages of the production process.
If inflation is unexpectedly high, borrowers will benefit and lenders will be harmed.
True
Suppose James and Frank both retire this year. For income from retirement, James will rely on a pension from his company that pays him a fixed $2,500 per month for as long as he lives. James hasn't saved anything for retirement. Frank has no pension but has saved a considerable amount, which he has invested in certificates of deposit (CDs) at his bank. Currently, Frank's CDs pay him interest of $2,300 per month. a. Ten years from now, Real income is defined as the following: b. Now suppose that instead of being a constant amount, James's pension increases each year by the same percentage as the CPI. For example, if the CPI increases by 5 percent in the first year after James retires, then his pension in the second year equals $2,500 + ($2,500 × 0.05) = $2,625. In this case, 10 years from now,
a. Frank will have a higher real income although he has a lower nominal income because his interest income is likely to increase with inflation. Real Income = (Nominal Income/CPI current year) x 100 b. James will have a higher real income because he has a higher nominal income and his income is indexed with the CPI.
The real interest rate
is equal to the nominal interest rate minus the inflation rate.
Suppose that Apple and the investors buying the firm's bonds both expect a 3 percent inflation rate for the year. Further, suppose the nominal interest rate on bonds is 7 percent and the expected real interest rate is 4 percent. Now suppose that a year after the investors purchase the bonds, the inflation rate turns out to be 4 percent, rather than the 3 percent that had been expected. In this situation, investors ___ and borrowers ___.
lose, win
The difference between a nominal variable and a real variable is that
nominal variables are calculated in current-year prices and the real variables are measured in dollars of the base year for the price index to correct the effects of inflation.
Inflation can affect the distribution of income because
people with incomes rising faster than the rate of inflation enjoy an increasing purchasing power, while people with incomes rising more slowly than the rate of inflation are hurt by a decreasing purchasing power.
Menu costs are
the costs to firms of changing prices.
The difference between the nominal interest rate and the real interest rate is
the nominal interest rate is the stated interest rate whereas the real interest rate is the nominal interest rate minus the inflation rate.
The BLS collects price statistics from traditional full-price retail stores, which do not reflect the prices some consumers pay by shopping at discount stores or on the Internet. This is a description of which bias?
the outlet bias
Computation of the CPI assumes that households buy the same market basket of products each month. For this reason, which one of the following factors is not relevant in calculating the CPI?
the quantities of the products households purchase in the current year
Changes in the CPI overstate the true inflation rate due to four "biases." If apple prices rise rapidly during the month while orange prices fall, consumers will reduce their apple purchases and increase their orange purchases. Which of the four biases is concerned with this consumer behavior?
the substitution bias
The type of inflation that is a greater problem to society is
unanticipated inflation, since it causes greater redistribution of income between those making payments and those awaiting payments in the future.
If the CPI was 207 in 2009 and 225 in 2013, what wage would someone who earned a $50,000 income in 2009 have to earn in 2013 in order to keep her purchasing power constant?
$54,348
Your father earned $34,000 per year in 1984. To the nearest dollar, what is that equivalent to in 2014 if the CPI in 2014 is 215 and the CPI in 1984 is 104?
$70,288
If the inflation rate is 6 percent and the nominal interest rate is 4 percent, then the real interest rate is
-2 percent, which is the nominal interest rate minus the inflation rate.
If a 3-month Treasury bill pays 5.5% and the change in the consumer price index (CPI) is 4.7%, what is the real interest rate (the true return to lending)?
0.8%
An article in the Wall Street Journal asks the question, "How can inflation be low when everything is so expensive?" The article also notes that "the CPI shows that prices are the highest they've ever been." Source: Josh Zumbrun, "5 Things You Always Wanted to Know about Inflation Statistics," Wall Street Journal, May 15, 2014. Is there a contradiction between a low inflation rate as measured by the CPI and the observations that prices are "the highest they've ever been" and everything is "so expensive"?
No, because the CPI and inflation measure only changes in the price level, not the absolute level of prices.
Of the eight categories in the CPI market basket, which three categories make up more than 75 percent of the basket?
housing, transportation, and food
The BLS surveys 30,000 households on their spending habits. The results are used to construct a market basket of goods and services purchased by the typical urban family of four. The chart on the right shows these goods and services grouped into eight broad categories for December 2014. The percentages represent the expenditure shares of the categories within the market basket. Which of the following categories make up about three-quarters of the market basket?
housing, transportation, and food
