Econ 104 Quiz 2

Which of the following is expressed in dollar terms?

Real GDP

If the CPI went from 100 last year to 110 this year, and if a newspaper's nominal price was $1 last year, in this year's values it would be worth ___.

(110/100)•$1.00 To put a nominal price from one year in terms of prices in another year, we multiply by the ratio of the CPIs for the two years. In addition, note how last year's values cancel out -- they're in the numerator ($1 for a newspaper last year) and in the denominator (100 for the CPI). The result is in terms of values for this year -- the 110 for the CPI. Thus, the nominal price is converted from one year's values to another.

Say that the CPI this year is 200 and that last year it was 180. The nominal price of a gallon of milk was $4.00 last year. After adjusting for inflation, what would it be in today's prices?

(200/180)*$4.00 As prices have risen from last year to this year, you would expect the price of milk to be larger if it increased with inflation (which is what we're doing if we're converting a nominal price from one year). Thus, you use the ratio of the CPI values. Another way to put it is that 180 is from last year, as is $4.00. However, 200 is from this year. Thus, in the calculation, you're canceling out values from last year (in both the numerator and denominator) and you're left with values from this year. Finally, note if that if you're just multiplying by the CPI value of 180 or 200 (and not the ratio of the CPI values) the resulting value is far too large.

The GDP deflator is ___.

(nominal GDP / real GDP) ∙ 100

Which period saw the greatest increases in the GDP deflator?

1980 to 1990 From our charts, recall how the GDP deflator had a greater rate of increase in the 1970s into the early 1980s. Put another way, this was a period with a higher rate of inflation than the years that followed.

If nominal GDP was $20 trillion and real GDP was $10 trillion, then the GDP deflator would be ___.

200 Recall how GDP deflator = ((nominal GDP)/(real GDP)) ● 100 .To explain what this formula is saying, say that we're one year after real GDP's base year (when real GDP = nominal GDP) and we find then that nominal GDP > real GDP. The only way this could happen is if prices rose since both GDP's have the same amount of production. Using this idea that if nominal GDP > real GDP is prices rose leads us to the formula for the GDP deflator of GDP deflator = ((nominal GDP)/(real GDP)) · 100 -- it picks up when prices rise by using the ratio of nominal to real GDP.

Let's say that over the last year your nominal salary increased by 4% and that the CPI increased by 1%. Then your real salary increased by ___.

3% In this case, you're earning 4% more dollars while the prices of things you purchase (represented by the CPI) rises by 1%. Thus, while you have more dollars, some of them are used to purchase more expensive items. Thus, your real income rose by 3% -- the increased number of dollars you earn (4%) less how much more expensive goods are (1%). More generally, real wages change by %change nominal wage - inflation (and the latter is the percent change in prices).

Say that the price of cat food increased by 5% one year and the CPI increased by 2%. Then you know that the real price of cat food changed by __.

3% Since we're given rates of change, to compute how much the real price of cat food changed we simply subtract the nominal rate of increase less the inflation rate. Thus, 5% - 2% = 3%.

Which of the following would be the best example of capital?

A refrigerator for food storage at a restaurant

When was the most rapid growth in the GDP deflator in the period since 1970?

At the start of this period

Say that the deficit is zero and then taxes fall. Then there will ____ a deficit and the federal debt will ______ .

Be, Rise

For which of the following do we NOT use percentage change when calculating their values?

CPI Recall how economic growth is the percentage change in real GDP while inflation is the percentage change in a price index (either the GDP deflator or the CPI). The CPI itself is the ratio of the value of the market basket (typical purchases by a household) for the period in question divided by the cost of the market basket in the CPI's base period and then multiplied by 100.

Which two are most likely to go together? ___ inflation and ___ in the GDP deflator.

High, large increases Recall how the inflation rate is the percentage change in the GDP deflator (a price index for the entire economy). Thus, high inflation means that the GDP deflator is increasing by a large amount. For example, if in one year the GDP deflator went from 110 to 130 (a large change since at the end of 2015 it had a value of 110 its base year is 2009 when it was 100) then the rate of inflation would be ((130-110)/110) · 100 = 18%.

In 2015, which type of household saw the largest increase in their income?

High-income

Why would one care about the core CPI?

It removes particularly volatile CPI components from the regular CPI. The definition of the core CPI is that it removes volatile components (i.e., food and energy prices) from the regular or "headline" CPI to give a better sense of the underlying inflation rate. For example, gasoline prices frequently rise or fall. When they fall, the CPI will grow more slowly and might even decline. But, gasoline prices generally bounce back up in a few years and then there would be more inflation than usual. To get a sense of inflation without these swings (i.e., the "underlying" rate of inflation) we often use the core CPI.

The federal funds rate is part of what?

Monetary policy

If the CPI rose 5% from one year to the next, you could be sure of what?

Prices of goods purchased by consumers rose

Which of the following is most directly part of the dual mandate?

Stable prices?

If you were in the base year for a country's GDP deflator it and both real and nominal GDP rose by 4% the next year then you would know what?

That prices were unchanged

Over the last year, which of the following grew most rapidly?

The Core CPI

Which of the following has the least control over the federal debt?

The Fed

Which experienced disinflation in the years since 1970?

The GDP Deflator

Which tends to vary less from year to year?

The core CPI

Which of the following is currently the largest?

The federal debt

Deflation is best described as

a fall in prices

Which of the following would NOT be measured in terms of dollars (i.e. would NOT have a dollar sign in front)?

a price index Real and nominal GDP had a dollar sign in front since they're computed by calculating the value of all final produced goods and services. That is, we multiple the price of each good in GDP by the amount produced. The market basket in the CPI uses a similar calculation -- for each item in the market basket, one multiplies its price by the amount in the basket. But, with the CPI the dollar signs cancel out.This is a general feature of price indices, like the CPI and the GDP deflator. They're pure numbers without money values attached to them. This should be sensible as they're really ratios.

The CPI is best thought of as ___.

a ratio of how much goods and services cost at different times

The GDP deflator is best described as

a way to measure prices

When was the most rapid growth in the CPI in the period since 1970?

at the start of this period When you look at the chart of the CPI you'll see that it rose most rapidly (or had the highest inflation rate) in the 1970s and early 1980s. This would be at the start of the period from 1970 until today.

One would ___ when you're converting a nominal price from one year to another.

divide In this case, you'd use the division method to compute the new price. Thus, you would divide. Learning Goal 1_5

If a country was experiencing deflation, then its plot of the GDP deflator would be ___ and the rate of inflation would be ___.

downward sloping, negative First, recall that deflation is falling prices; it is the opposite of inflation. Also, note that disinflation is a falling rate of inflation; say from 4% to 2%, but prices as still rising. In our plots of GDP and the CPI, recall how their values rose, or was upward sloping, when there is inflation. We saw a bit of deflation with the CPI during the Great Recession and then the data went downward, or had a negative slope.

A price index is typically measured in dollar amounts.

false

The GDP deflator falls during recessions.

false

If the inflation rate was 2% and the dollars people earned at work was unchanged, then ___.

real wages fell Recall how the percent change in a real variable is its percent change in its nominal value less inflation. Thus, in this case, real wages fell. Put another way, workers weren't staying up with inflation. Learning Goal 1_5

When does one compute the value of a "market basket?"

for the CPI Recall how the CPI is the ratio of the value of two market baskets. Recall how the market basket is the cost of a set of goods and services (a bit like how much it costs to fill a shopping cart at the grocery story). The same number of items are purchased when computing the CPI, but prices from the month in question and the base period are used. For example, the CPI for 12/2010 would be ((market basket cost with 12/2010 prices)/(market basket cost with base period prices)) · 100.

If the core CPI was increasing faster than the headline (or regular) CPI, then what is most likely happening?

gas prices are falling Let's put some numbers to this. Say that the core CPI inflation was 4% and the headline (or regular CPI) inflation was 2%. Thus, something is causing a lower rate of inflation for all goods and services that consumers buy than for goods and services without food and energy prices. This would be the case if gasoline prices were falling -- it would lead to lower inflation for all goods and services.

Which of the following tends to be more stable from year to year?

inflation measured by the core CPI From our charts, you'll see that inflation as measures by the core CPI is more stable from year to year. This should be sensible the core CPI does not include the most volatile parts of the CPI, food and energy prices. In a period when gasoline prices are falling, like 2015, inflation as measured by the CPI will decrease but the core rate will be unaffected by the fall in gasoline prices.

If the CPI was improved to remove its known inaccuracies, the reported rate would be ___.

lower As in the textbook, it is thought that the CPI overestimates the actual inflation rate. That is, if inflation, as reported by the percentage change in the CPI was 2.0%, the correct rate would be about 0.5% less, or 1.5%. This is due to a number of biases in how the CPI is constructed.

Which two ways are sure to show deflation?

negative inflation, falling prices

Economists generally think that the CPI ___ the rate of inflation. The reasons include the ___ bias.

overstates, substitution

If the GDP deflator had a value of 200, you could be sure that ___.

prices had doubled since the base year One cannot compute the inflation rate here since the question does not say that the GDP deflator went from 100 to 200 in one year -- we measure inflation on an annual basis. However, we do know that the GDP deflator has a value of 100 in its base period, so if it later it was equal to 200, then prices must have doubled.

Since 1970, which of the following is most likely to decrease now and then?

real GDP

If there was deflation over a year in an expansion, which would grow the most over that year?

real GDP An expansion means that the production of goods is increasing, while deflation means that prices are falling (i.e. the GDP deflator would fall). Recall how when we compute GDP, we multiply the price of each produced good (like cars, boats, meals, and so on) times the amount produced (the number of cars, boats, meals, and so on). Also recall that real GDP keeps prices constant, while nominal GDP uses prices from the year in question. In this case, real GDP would rise since prices are held constant and production increases. Nominal GDP would increase by a smaller amount (or even decrease) as prices used to compute it are falling. Finally, the GDP deflator would be sure to fall as prices are falling.

Someone would use ___ when they have the rate of inflation and want to compute ___ prices.

subtraction, real Here, you're using the subtraction method -- you find the percent change in something's nominal price and subtract off the rate of inflation. Learning Goal 1_5

Which price index measures the largest number of goods and services?

the GDP deflator

Which is least likely to fall in the recessions since 1970?

the GDP deflator Almost by definition real GDP falls in recessions, while the CPI only fell in 2009 during the Great Recession (and a tine bit in 2015 when gas prices fell). However, the GDP deflator hasn't fall since 1970 (though it didn't grow very quickly during the Great Recession. All of these facts come from our charts.

Which of the following is the smallest in size?

the current value of the GDP deflator

If the market basket doubled in value from one year to the next, then for sure ___.

the inflation rate was 100% Recall how the CPI is the ratio of the values of the market basket. It has nothing to do with real GDP (used to compute economic growth) or the GDP deflator. As we're describing how the market basket doubled in value, it would be the case that prices in general doubled, which would be an inflation rate of 100%.

Why do economists sometimes use the core rate of inflation? To remove ___.

transitory and volatile factors

The value of the CPI can be less than 100.

true