ECON TEST 2
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 $1,909 in 1989 and that the CPI index was 126 in 1989. If the CPI index was 221 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 $6,384. Relative to the expected cost computed above, the cost of tuition increased by ____ the amount of inflation.
$3348 more than
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 2018 was 251. The income you would have needed in 2018 to have had the same purchasing power that Fitzgerald's $36,000 had in 1924 is
$531529 36,000 x (CPI 2018/CPI 1924)= 36,000 (251/17)
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. (34000x(215/104)
What is the real average hourly wage in 2009? 2009 $17.00 207 What can be said about real average hourly earnings and nominal average hourly earnings between 2008 and 2010?
$8.21 Nominal Hour wage/CPI X 100 Both real and nominal average hourly earnings increased.
Indicate which of the following would cause a shift in the aggregate demand curve from point A to point C.
- Lower interest rates - Decrease in the U.S. exchange rate relative to other currencies - Lower taxes - Increased consumer optimism
Even perfectly anticipated inflation imposes costs. Why?
- Menu costs. - Some wages will fail to keep up with anticipated inflation. - Paper money loses its purchasing power by the rate of inflation.
If the inflation rate is 6 percent and the nominal interest rate is 4 percent, then the real interest rate is The real interest rate equals
-2 percent, which is the nominal interest rate minus the inflation rate. 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% Real interest rate = Nominal interest rate - Inflation rate 5.5%-4.7%=0.8%
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 economy's consumer price index (CPI) in 2008 was 189 and the CPI in 2009 was 196. The inflation rate over the period from 2008-2009 was equal to
3.7%. (196-189/189)x100
Suppose that in 2018, three cups of coffee and a donut can be purchased for $10. The CPI in 2018 was 251If 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 2058, the CPI would have to be
50200(2000x251/10)
Briefly explain why ending a period of falling prices might result in higher consumer and firm spending.
Buyers will buy more now if they believe that inflation will follow a period of falling prices.
The price index which is used to measure changes in the cost of living is the
Consumer Price Index (CPI).
Which of the following is not considered one of the potential biases in calculating the consumer price index?
Coverage bias. - Outlet bias. - Substitution bias. - Increase in quality bias. - New product bias.
Briefly explain whether you agree or disagree with the following statement: "I don't believe the government price statistics. The CPI for 2018 was 220, but I know that the inflation rate couldn't have been as high as 120 percent in 2018."
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 deflationLOADING... 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.
Considering how the CPI is constructed, why would ice cream be more important than bacon in calculating inflation?
Ice cream would be more important if consumers spent a higher fraction of their budgets on ice cream than on bacon.
Suppose that Apple and the investors buying the firm's bonds both expect a 2 percent inflation rate for the year. Further, suppose the nominal interest rate on bonds is 6 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 1 percent, rather than the 2 percent that had been expected.
In this situation, investors win and borrowers lose
What does the article mean that the yuan had "risen" against the dollar? Briefly explain whether the combination of other currencies rising against the dollar and stronger economic growth in Asia and Europe had led to an increase or a decrease in U.S. net exports. Will the outcome you discussed above result in a movement along the U.S. aggregate demand curve or a shift of the aggregate demand curve? Briefly explain.
It now takes more dollars to buy one yuan. Increase, because U.S. exports are cheaper. Shift of the U.S. aggregate demand curve, because this is not a change in the price level.
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?
Lenders lose from a lower real interest rate. Borrowers gain from a lower real interest rate.
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.
Albanda is an agrarian economy located in South Asia. Shen Chou and her friend Wang Tao are discussing the efficacy of the Consumer Price Index. Shen, who works with a nonprofit organization, says that the Consumer Price Index does not reflect the realities of consumption patterns of the average consumer. Wang, a policy planner, says that it must be accurate because it was updated only a year ago. Which of the following, if true, would strengthen Shen's argument?
Pensioners whose benefit payments are directly linked to the changes in CPI reported a decreased purchasing power compared to the previous year.
Which of the following can give an early warning of future increases in the price level?
Producer price index
Which of the following causes changes in the CPI to overstate the true inflation rate?
Substitution bias Increase in quality bias New product bias
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.
Because the new iPhone models replaced the older models in the basket of goods used to calculate the CPI, how did the higher prices of the new iPhones affect the CPI? If the new iPhone models had had the same prices as the iPhone models of the previous year, how would the introduction of the new iPhone models have affected the CPI?
The CPI does not change. The CPI would have decreased.
The central bank of the country Iberia recently announced a reduction in the interest rate by 150 basis points. Following this announcement, Matthew Boulder, who is interested in buying a house, expects the real interest rates also to fall. However, he notices that the real interest rate in the economy has actually increased. Which of the following is most likely to explain this outcome?
The Iberian economy is going through a period of deflation.
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.
The difference between a nominal variable and a real variable is that
The difference between a nominal variable and a real variable is that
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.
To have no substitution bias, the demand curves for the products in the market basket would need to be _____
Vertical
Which one of the following is not true when the economy is in macroeconomic equilibrium?
When the economy is at long-run equilibrium, firms will have excess capacity.
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.
Which of the following would cause a decrease in aggregate demand?
a decrease in government spending
From June 2009 to June 2019, the Standard & Poor's Index of 500 stock prices increased by more than 300 percent, while the consumer price index increased by less than 18 percent. These changes would have caused
an increase in the real value of household wealth, which shifted the aggregate demand curve to the right.
A movement from point A to point B on AD1 could be the result of a A movement from point A to point C could be the result of a
change in the price level. change in the expectations of households.
The long-run aggregate supply curve is vertical because in the long run,
changes in the price level do not affect potential GDP, as potential GDP depends on the size of the labor force, capital stock, and technology.
An average of the prices of the goods and services purchased by a typical family is the:
consumer price index (CPI).
The federal government increases taxes in an attempt to reduce a budget deficit. Because this is a change in ___ it will cause a ___ the aggregate demand curve
consumption/shift to the left in
Aggregate demand (AD) is comprised of expenditure components that include:
government spending, consumption, investment, and net exports.
The Chapter Opener noted that "GM and the rest of the automobile industry are dependent on whether the current economic expansion...would continue." GM is dependent on whether the current expansion would continue because Are fast-food restaurants as dependent on an economic expansion as the automobile industry? Briefly explain.
households typically postpone buying durable goods like automobiles during a recession, thus GM's sales would fall Less dependent, because consumer spending on nondurable goods is less affected by expansions and contractions.
Firms become more optimistic and increase their spending on machinery and equipment. Because this is a change in ___ it will cause a ____ the aggregate demand curve.
investment/ shift to the right in
A change in the price level will cause the long-run aggregate supply curve to
move along a stationary LRAS curve
In the diagram to the right, moving from point A to point B is called a ____ the AD curve Moving from point A to point C is referred to as a ___ the AD curve.
movement along/shift in QUESTION 12 Hw 5
An increase in the price level will cause a ____ the aggregate demand curve. An increase in government purchases will cause a ____ the aggregate demand curve. An increase in state income taxes will cause a ___ the aggregate demand curve. An increase in interest rates will cause a ___ aggregate demand curve. A faster income growth in other countries will cause a ___ the U.S. aggregate demand curve.
movement up along rightward shift of leftward shift of leftward shift of. rightward shift of
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.
The aggregate demand curve shows the relationship between the ___ and ___ The aggregate demand curve is downward sloping because
price level/output demanded an increase in the price level reduces real money holdings, which reduces the amount of expenditures.
A monetary policy change that causes a decrease in interest rates will result in
the aggregate demand curve shifting to the right.
Menu costs are The Internet has ____ the size of menu costs.
the costs to firms of changing prices. reduced
The aggregate demand curve shows the relationship between The short run aggregate supply curve shows the relationship in the short run between
the price level and the quantity of real GDP demanded by households, firms, and the government the price level and the quantity of real GDP supplied by firms
The U.S. economy experiences 4 percent inflation. Because this is a change in ___ it will cause a ____ the aggregate demand curve.
the price level/ movement along
The price level increases. Because this is a change in ___ , the LRAS curve will ____ The labor force increases. Because this is a change in ___ , the LRAS will ____ There is an increase in the quantity of capital goods. Because this is a change in ____ , the LRAS will ___ Technological change occurs. Because this is a change in ____ , the LRAS will ____.
the price level/not change the productive capacity of the economy/shift to the right. the productive capacity of the economy/shift to the right. the productive capacity of the economy/shift to the right
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 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 substitution bias the outlet bias
Increases in interest rate will make the aggregate demand curve shift
to the left
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.
Calculate the percentage change in U.S. real minimum wages between 1957 and 2018: Calculate the percentage change in French real minimum wages between 1957 and 2018: Based on the above calculations, we can conclude that
-22.01% Convert real wages (US) 1957 (1.00/27)*100=3.7037 2012 (7.25/251)*100=3.1522 Calculate percentage change (US) ((3.1522-3.7037)/3.7037)*100=-14.8905 303.88%. although nominal minimum wages increased in the U.S., real minimum wages fell during this period.
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
