Econ iQuiz #2
In 1971, the cost of a four-year college degree from a public university was about $1,410. The consumer price index was 40.48 in January 1971. If the current consumer price index is 251.1, what is the approximate cost of the four-year degree in current dollars?
$8,746 (CPI Current - CPI 1917) / CPI 1917 = ANSWER x 1,1410 = ANSWER + 1,1410
Real exchange rate
(domestic price in dollars) ÷ (foreign price in foreign currency ÷ nominal exchange rate)
Nominal GDP grew by 4%, and the growth rate of real GDP was 2.5%. Based on this information, (approximately) what was the rate of inflation?
1.5%
Working Age ("adult") Population
16 years or older and not instituionalized
An economy-wide real exchange rate reflects what?
Broad changes in competitiveness
Both the CPI and the GDP deflator measure changes in the prices of goods and services and tend to change in similar ways over time. In the third quarter of 2018, the CPI rose by 1.5% from the previous quarter, while the GDP deflator rose by only 0.7% over the same period.
Changes in the CPI reflect changes in the prices of the goods and services in the fixed basket—and so may overstate inflation. Changes in the GDP deflator, however, reflect changes in the prices all domestically‑produced goods and services.
A real exchange rate of 3/4 would mean what?
Domestic producers charge a price that is three-fourths that of foreign producers
Civilian Labor Force
Employed + Unemployed (adult population - those not in the civilian labor force)
πe
Expected inflation rate
Real prices adjust for what?
Inflation
An employer paying an efficiency wage experiences higher or lower costs of labor?
Lower
Menu costs
Marginal costs of adjusting prices.
The consumer price index
Measures a fixed basket of goods bought by the general populace on a regular basis
Variables such as the amount spent on a car wash last week, a current stock price, or the current GDP of the economy would be classified as what?
Nominal
When comparing prices within the same year, what prices are better?
Nominal
i
Nominal interest rate
Nominal Interest Rate Formula
Real Interest Rate (real risk free rate + risk premium) + Expected Inflation
r
Real interest rate (risk-free rate + risk premium)
What explains how a current account deficit could reflect valuable investments in the future?
The deficit possibly reflects strong investment potential and a current need for capital.
Equilibrium unemployment rate
The long‑run unemployment rate to which the economy tends to return over time
GDP Deflator
The price of all goods and services produced domestically
Frictional Unemployment
Unemployment that occurs when people take time to find a job
Structural Unemployment
Unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one
Cyclical Unemployment
Unemployment that rises during economic downturns and falls when the economy improves
Index Wage Rate Formula
Wage next year = wage this year (1 + inflation rate)
Realized Real Interest Rate Formula
i - π (nominal interest rate - actual rate of inflation)
The real interest rate
nominal interest rate - rate of inflation.
How do you find nominal GDP
price level x real GDP
Indexation Formula
𝑡𝑜𝑑𝑎𝑦′𝑠 𝑝𝑟𝑖𝑐𝑒= 𝑝𝑎𝑠𝑡 𝑝𝑟𝑖𝑐𝑒 1+%∆𝑃
Labor-Force Participation Rate Formula
(Labor force / Working age population) x 100
Indexation
Automatically adjusting wages, benefits, tax brackets, and the like to compensate for inflation
Money illusion
Tendency to focus on nominal values instead of inflation-adjusted values.
Basket
A bundle of goods and services that people consistently buy
Okan's Rule of Thumb
A one-point increase in the cyclical unemployment rate is associated with two percentage points of negative growth in real GDP
GDP deflator
A price index that tracks the price of all goods and services produced domestically
π
Actual (realized) rate of inflation
In the exchange market for U.S. dollars, the supply of the dollar is _____ -sloping because when the price of the dollar is high, suppliers gain _____ of that foreign currency for their dollars.
upward; a lot
Unemployment Rate Formula
(# of unemployed/labor force) x 100
Nominal exchange rate formula
(Basket cost of foreign currency) / (US $ basket cost)
How to calculate inflation rate
(Change in price since last year ÷ prices this year) × 100
How to find real GDP?
(Nominal GDP/Price Index) x 100
How to find GDP deflator?
(Nominal GDP/Real GDP) x 100
Employment-to-Population Ratio Formula
(Number of Employed / Working-Age (adult) Population) x 100
Output Gap Formula
(Real GDP - Potential Output)/(Potential Output) x 100
You purchase a certificate of deposit that earns an advertised rate of 1.75% interest per year. What is your real rate of return if the actual inflation rate is 1.9%?
-0.15%
An appreciation of the real exchange rate would cause the United States to import ______ and export ________
1. More 2. Less
If you see that the consumer price index this year is lower than the consumer price index last year, this means what?
On average, prices went down across the economy.
You purchase a certificate of deposit and expect an inflation rate of 1.25% over the next year. Your nominal rate of interest is 2.1%. What is your expected real rate of return?
0.85%
A wage above the market equilibrium does what?
1. Enables the company to increase its profit 2. Will increase the productivity of employees 3. May reduce employee turn‑over rate for the company.
The inflation rate measured by the personal consumption expenditure deflator, or PCE deflator, is consistently _____ than inflation measured by the consumer price index because the consumer price index _____ account for substitution bias.
1. Lower 2. Does not
Why is the long‑run unemployment rate is not equal to zero?
1. The process of matching workers to jobs is not instantaneous 2. There are structural impediments preventing wages from falling enough to make the quantities of labor supplied and demanded equal.
When comparing prices between years, what prices are better?
Real
