ECON 110 Midterm 2

GDP Deflator =

(Nominal GDP/Real GDP) x 100

CPI =

(Price of basket of goods and services in current year/price of basket in base year) x 100

2 major differences between GDP deflator and CPI

1. The first difference is that the GDP deflator reflects the prices of all goods and services produced domestically, whereas the CPI reflects the prices of all goods and services bought by consumers. 2. CPI compares the price of a fixed basket of goods and services to the price of the basket in the base year. GDP deflator compares the price of currently produced goods and services to the price of the same goods and services in the base year.

3 problems with CPI

1. substitution bias 2. introduction of new goods 3. unmeasured quality change

Ruben earned a salary of $60,000 in 2001 and $80,000 in 2006. The consumer price index was 177 in 2001 and 221.25 in 2006. Ruben's 2001 salary in 2006 dollars is $75,000; thus, Ruben's purchasing power increased between 2001 and 2006. $75,000; thus, Ruben's purchasing power decreased between 2001 and 2006. $85,000; thus, Ruben's purchasing power increased between 2001 and 2006. $85,000; thus, Ruben's purchasing power decreased between 2001 and 2006.

A. $75,000, purchase power increased

Which of the following changes in the price index produces the greatest rate of inflation: 12 to 15, 20 to 24, or 30 to 35? 12 to 15 20 to 24 30 to 35 All of these changes produce the same rate of inflation.

A. 12-15

If the nominal interest rate is 5 percent, and the rate of inflation is 3 percent, then the real interest rate is equal to 2 percent. 0.6 percent. 1.7 percent. 15 percent.

A. 2%

Between October 2014 and October 2015, the CPI in Canada rose from 120 to 124 and the CPI in Mexico rose from 210 to 229.1. What were the inflation rates for Canada and Mexico over this one-year period? 3.3 percent for Canada and 9.1 percent for Mexico 3.3 percent for Canada and 8.3 percent for Mexico 3.2 percent for Canada and 9.1 percent for Mexico 3.2 percent for Canada and 8.3 percent for Mexico

A. 3.3%; 9.1%

Which of the following agencies calculates the CPI? Bureau of Labor Statistics Congressional Budget Office Federal Reserve Bureau of National Price Standards and Records

A. Bureau of Labor Statistics

The real interest rate tells you how fast the number of dollars in your bank account rises over time. how fast the purchasing power of your bank account rises over time. the number of dollars in your bank account today. the purchasing power of your bank account today.

B

When studying changes in the economy over time, economists want a measure of the total quantity of goods and services the economy is producing that is not affected by changes in the prices of those goods and services. In other words, economists want to study A. nominal GDP. B. real GDP. C. the GDP deflator. D. GNP

B

If the CPI was 104 in 1967 and is 390 today, then $10 in 1967 purchased the same amount of goods and services as $2.67 purchases today. $37.50 purchases today. $39.00 purchases today. $104.00 purchases today.

B. $37.50

In 2009, the U.S. government's budget deficit increased substantially. Other things the same, this means the a. supply of loanable funds shifted to the right. b. supply of loanable funds shifted to the left. c. demand for loanable funds shifted to the right. d. demand for loanable funds shifted to the left.

B. supply of loanable funds shifted to the left

2 most important financial intermediaries:

Banks & mutual funds

An American company operates a fast food restaurant in Paris, France. Which of the following statements is accurate? A. The value of the goods and services produced by the restaurant is included in both French GDP and U.S. GDP. B. The value added by American workers and equipment in France is included in U.S. GDP and the value added by French workers and equipment is added to French GDP. C. The value of the goods and services produced by the restaurant is included in French GDP, but not in U.S. GDP. D. The value of the goods and services produced by the restaurant is included in U.S. GDP, but not in French GDP.

C

For the economy as a whole, A. income must be greater than expenditure. B. unemployment must rise when GDP rises. C. expenditure must equal income. D. Consumption must be greater than investment

C

The GDP deflator is the ratio of A. real GDP to nominal GDP multiplied by 100. B. real GDP to the inflation rate multiplied by 100. C. nominal GDP to real GDP multiplied by 100. D. nominal GDP to the inflation rate multiplied by 100.

C

The steps involved in calculating the consumer price index and the inflation rate, in order, are as follows: -Choose a base year, update the basket, find the prices, estimate the basket's cost, compute the index, and compute the inflation rate. -Choose a base year, fix the basket, find the prices, compute the inflation rate, compute the basket's cost, and compute the index. - Fix the basket, find the prices, compute the basket's cost, choose a base year and compute the index, and compute the inflation rate. -Fix the basket, find the prices, compute the inflation rate, compute the basket's cost, and choose a base year and compute the index.

C

What word do economists use to refer to the purchase of goods that will be used in the future to produce more goods and services? A. capital B. consumption C. investment D. Costs

C

Suppose the consumer price index was 184 in 2009 and 198.17 in 2010. The nominal interest rate during this period was 5.8 percent. What was the real interest rate during this period? 0.4 percent 1.2 percent -1.9 percent -2.6 percent

C. -1.9%

Suppose a basket of goods and services has been selected to calculate the CPI and 2012 has been selected as the base year. In 2012, the basket's cost was $77; in 2013, the basket's cost was $82; and in 2014, the basket's cost was $90. The value of the CPI in 2014 was 109.8 and the inflation rate was 9.8%. 109.8 and the inflation rate was 16.9%. 116.9 and the inflation rate was 9.8%. 116.9 and the inflation rate was 16.9%.

C. 116.9, 9.8%

The CPI was 220 in 2012 and 231 in 2013. Phil borrowed money in 2012 and repaid the loan in 2013. If the nominal interest rate on the loan was 10 percent, then the real interest rate was -5 percent. -1 percent. 5 percent. 3.2 percent.

C. 5%

Two alternative measures of the overall level of prices are the inflation rate and the consumer price index. the inflation rate and the GDP deflator. the GDP deflator and the consumer price index. the cost of living index and nominal GDP.

C. GDP deflator & CPI

One problem with the consumer price index stems from the fact that, over time, consumers tend to buy larger quantities of goods that have become relatively less expensive and smaller quantities of goods that have become relatively more expensive. This problem is called price-change neglect. unmeasured quality change. substitution bias. relative bias.

C. Substitution bias

When the overall level of prices in the economy is increasing, economists say that the economy is experiencing economic growth. stagflation. inflation. deflation.

C. inflation

The basket of goods in the consumer price index changes - occasionally, as does the group of goods used to compute the GDP deflator. - automatically, as does the group of goods used to compute the GDP deflator. - occasionally, whereas the group of goods used to compute the GDP deflator changes automatically. - automatically, whereas the group of goods used to compute the GDP deflator changes occasionally.

C. occasionally, whereas GDP deflator changes automatically

The CPI is a measure of the overall cost of the goods and services bought by a typical firm. the government. a typical consumer. All of the above are correct.

C. typical consumer

The fact that borrowers sometimes default on their loans by declaring bankruptcy is directly related to the characteristic of a bond called

Credit Risk

A farmer produces oranges and sells them to Fresh Juice, which makes orange juice. The oranges produced by the farmer are called A. inventory goods. B. transitory goods. C. final goods. D. intermediate goods.

D

In a simple circular-flow diagram, households buy goods and services with the income they get from A. wages. B. rents. C. profits. D. All of the above are correct

D

In the base year, the GDP deflator is always A. -1. B. 0. C. 1. D. 100.

D

The inflation rate is the A. absolute change in real GDP from one period to another. B. percentage change in real GDP from one period to another. C. absolute change in the price level from one period to another. D. percentage change in the price level from one period to another.

D

Which of the following is included in the investment component of GDP? A. households' purchases of newly constructed homes B. net additions to firms' inventories C. firms' purchases of capital equipment D. All of the above are correct.

D

Which of the following is included in the investment component of GDP? A. spending to build new houses B. spending to build new factories C. spending on business equipment such as welding equipment D. All of the above are included in the investment component of GDP.

D

Ethel purchased a bag of groceries in 1970 for $8. She purchased the same bag of groceries in 2006 for $25. If the price index was 38.8 in 1970 and the price index was 180 in 2006, then what is the price of the 1970 bag of groceries in 2006 dollars? $5.39 $25.00 $29.11 $37.11

D. $37.11

If the price of Italian shoes imported into the United States increases, then - both the GDP deflator and the consumer price index will increase. - neither the GDP deflator nor the consumer price index will increase. - the GDP deflator will increase, but the consumer price index will not increase. - the consumer price index will increase, but the GDP deflator will not increase.

D. CPI will increase, GDP deflator will not increase

Net National Product (NNP)

GNP - depreciation

GDP

Gross Domestic Product- the total market value of all final goods and services produced within a country in a given period of time

GNP

Gross National Product - the total income earned by a nation's permanent residents

Which of the following restrictions implies that saving and investment are equal for a closed economy?

No restriction is necessary; saving and investment are equal for all closed economies.

The identity that shows that total income and total expenditure are equal is

Y = C + I + G + NX

Y = C + I + G + NX

Y = GDP C = consumption I = investment G = government purchases NX = net exports (open economy)

Inflation rate in year 2=

[(GDP deflator year 2- GDP deflator year 1)/ GDP deflator year 1 ] X 100

Bond

a certificate of indebtedness; an IOU

Stock

a claim to partial ownership in a firm

Crowding Out

a decrease in investment that results from government borrowing

Producer Price Index (PPI)

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

GDP deflator

a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100

Budget Deficit

a shortfall of tax revenue from government spending

Amount in today's dollars =

amount in year T dollars x (price level today/price level in year T)

Closed Economy

an economy that does not interact with other economies in the world

Open economy

an economy that interacts freely with other economies around the world

Budget Surplus

an excess of tax revenue over government spending

Mutual Fund

an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds

For an economy as a whole, income must = ______

expenditure

Financial Markets

financial institutions through which savers can directly provide funds to borrowers

Financial Intermediaries

financial institutions through which savers can indirectly provide funds to borrowers

Personal Income

income that households and non-corporate businesses receive

Disposable Personal Income

income that households and noncorporate businesses have left after satisfying all their obligations to the government

CPI (Consumer Price Index)

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

real interest rate formula

real interest rate = nominal interest rate - inflation rate

Consumption

spending by households on goods and services, with the exception of purchases of new housing

Investment

spending on business capital, residential capital, and inventories

Net Exports

spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)

Government Purchases

spending on goods and services by local, state, and federal governments

Indexation

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

Financial System

the group of institutions in the economy that help to match one person's saving with another person's investment

Private Saving

the income that households have left after paying for taxes and consumption

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

Market for loanable funds

the market in which those who want to save supply funds and those who want to borrow to invest demand funds

inflation rate

the percentage change in the price level from the previous period

Real GDP

the production of goods and services valued at constant prices

Nominal GDP

the production of goods and services valued at current prices

Macroeconomics

the study of economy-wide phenomena, including inflation, unemployment, and economic growth

Microeconomics

the study of how households and firms make decisions and how they interact in markets

Public Saving

the tax revenue that the government has left after paying for its spending

Date of maturity

the time at which the loan will be repaid

National Saving

the total income in the economy that remains after paying for consumption and government purchases I = Y - C -G

National Income

total income earned by a nation's residents in the production of goods and services.