Macro - 3.3 Practices
Inflation_______ the purchasing power of money
decreases
chaining is used to determine
real GDP
how to calculate real price
same as real wage
in a year when the price level is 125, Charlie earns a nominal wage of $50,000. what is his real wage?
$40,000
some of the problems with using the CPI to measure inflation include:
*-*the market basket for 1999 includes some items not in the market basket for 1982 *-*the market basket for 1982 includes some items not in the market basket for 1999 *-*the CPI doesn't account for quality changes in the goods that it includes *-*substitution bias
a problem with hyperinflation is
*-*wages are paid daily *-*workers rush to turn wages into purchases *-*loans aren't made *-*money loses its purchasing power
we use the ______ to determine the purchasing power of income
CPI
what happens when the rate of time preference for consumers rises?
the demand curve shifts to the right
inflation measures
the percentage change in the CPI from one year to another
why do bonds with a B or C rating have a higher interest rate than bonds with a AAA rating?
they carry a greater risk of default
how to calculate price level?
total cost of base year total cost of year ------------------------- * ------------------- base year x *then solve algebraically*
the current base year for the CPI is
1982
a lender makes a one-year loan of 100$ with a nominal rate of 7%. if there's a 9% inflation rate, what is the real value of repayment?
98
what happens when households expect the inflation rate to increase in the future?
the demand curve shifts to the right
the bank for the United States government is:
U.S. Treasury
a mutual fund
spreads risk among many people
most investment in capital goods is done by
the business sector
how to calculate real value of payment
real interest rate * loan price --> subtract answer from loan price
which of these happens when there's a decrease in the risk of default? *Ans*: interest rates decrease
which of these happens when there's a decrease in the risk of default? *-*interest rates decrease *-*the supply of credit decreases *-*the demand for credit decreases *-*the quantity of borrowing decreases
which of these happens when there's decreasing uncertainty among firms about the future? *Ans*: the quantity of borrowing increases
which of these happens when there's decreasing uncertainty among firms about the future? *-*the quantity of borrowing increases *-*the demand curve shifts to the left *-*interest rates increase *-*the supply curve shifts to the left
which of these is a component of the interest rate on a 10-year inflation-indexed U.S. government bond? *Ans*: positive rate of time preference
which of these is a component of the interest rate on a 10-year inflation-indexed U.S. government bond? *-*expected inflation rate *-*positive rate of time preference *-*general uncertainty about the future *-*risk that the borrower will default
which of these is a component of the relatively low interest rate on a three month U.S. government bond? *Ans*: expected inflation rate
which of these is a component of the relatively low interest rate on a three month U.S. government bond? *-*general uncertainty about the future *-*high risk that the borrower will default *-*expected inflation rate *-*transaction costs of screening and monitoring borrowers
which of these is not a component of the interest rate on a 30-year U.S. government bond? *Ans*: transaction costs of screening and monitoring borrowers
which of these is not a component of the interest rate on a 30-year U.S. government bond? *-*expected inflation rate *-*transaction costs of screening and monitoring borrowers *-*general uncertainty about the future *-*positive rate of time preference
which of these would result in cost-push inflation? *Ans*: an increase in oil prices
which of these would result in cost-push inflation? *-*an increase in the standard of living *-*and influx of wealthy immigrants *-*an increase in oil prices *-*a cut in personal income taxes
why might tax cuts result in demand-pull inflation?
with more money to spend because of lower taxes, consumer demand will increase
how to calculate inflation rate
year (b) - year (a) ------------------- * 100 year(a)
how to calc total cost
add all prices together with quantity
why is the interest rate on a credit card generally much higher than government bond interest rates?
all five of the interest rate components apply to credit card debt
what happens when firms are more optimistic about future prospects?
interest rates increase
higher interest rates cause firms to:
invest in fewer capital goods
if inflation is _____ than expected, _______ is worse off
lower; borrower
even if inflation is correctly anticipated, costs due to inflation are still incurred. one such cost is called a:
menu cost
if there has been inflation since the base year, then the CPI is now:
more than 100
how to calculate real wage
nominal wage ---------------- * 100 price level
one reason the government doesn't attempt to correct the apparent problems with measuring the CPI is:
people with income adjustments based on the CPI would lose money
