Chapter 24 Economics

Price changes from year to year are not proportional, and consumers respond to these changes by altering their spending patterns. The problem this creates for inflation calculations is called

substitution bias.

Social Security payments are indexed for inflation using

the CPI.

One of the differences between the GDP deflator and the consumer price index is

the GDP deflator reflects prices for all goods and services produced domestically and the consumer price index reflects prices for some goods and services bought by consumers.

In 1983, one could buy a model radio-controlled airplane for $11.50 each. Those same planes are available today and the price increased at exactly the rate of inflation. If the CPI today is 220.5 and in 1983 was 105, what is the price of the airplane today?

$24.15

A worker received $5 for a daily wage in 1930. What is the value of that wage today if the CPI was 17 in 1930 and is 215 today?

$63.24

Table 24-6 The table below relates to the economy of Mainland, where the typical consumer's market basket consists of 2 iPhones and 3 hamburgers. Year Price of an iPhone Price of a hamburger 2007 $400 $3 2008 $300 $5 2009 $325 $7 Refer to Table 24-6. If the base year is 2007, then the economy's inflation rate in 2008 is

-24 percent.

The consumer price index was 200 in 2006 and 210 in 2007. The nominal interest rate during this period was 6.5 percent. What was the real interest rate during this period?

1.5 percent

Table 24-6 The table below relates to the economy of Mainland, where the typical consumer's market basket consists of 2 iPhones and 3 hamburgers. Year Price of an iPhone Price of a hamburger 2007 $400 $3 2008 $300 $5 2009 $325 $7 Refer to Table 24-6. If the base year is 2007, then the consumer price index (rounded to the nearest whole number) was

100 in 2007, 76 in 2008, and 83 in 2009.

Table 24-6 The table below relates to the economy of Mainland, where the typical consumer's market basket consists of 2 iPhones and 3 hamburgers. Year Price of an iPhone Price of a hamburger 2007 $400 $3 2008 $300 $5 2009 $325 $7 Refer to Table 24-6. If the base year is 2008, then the consumer price index (rounded to the nearest whole number) was

132 in 2007, 100 in 2008, and 109 in 2009.

Elizabeth just received her Ph.D. in economics and has two competing job offers. The first is in Washington, D.C. and pays a salary of $200,000. She has a similar job offer in Austin, TX that pays $90,000. Which pair of CPIs would make the two salaries have the same purchasing power?

160 in Washington, D.C. and 72 in Austin, TX

The nominal interest rate for a consumer loan lasting from 2007 to 2008 is 8.5 percent and the real interest rate is 4.5 percent. If the consumer price index was 200 in 2007, what would the consumer price index value be in 2008?

208

A worker received $5 for a daily wage in 1930, which has the equivalent value of $63.24 today. If the CPI was 17 in 1930 what is the value of the CPI today, rounded to the nearest whole number?

215

The relative importance of housing in the breakdown of consumer spending is

43 percent.

John just graduated law school and has two competing job offers. The first is in Phoenix and pays a salary of $150,000. He has a similar job offer in Cleveland that pays $90,000. Which pair of CPIs would make the two salaries have the same purchasing power?

70 in Phoenix and 42 in Cleveland

The consumer price index was 200 in 2008 and 190 in 2009. The nominal interest rate during this period was 4.5 percent. What was the real interest rate during this period?

9.5 percent

Which of the following statements regarding the consumer price index and the GDP deflator is correct?

Divergence between the two price measures is the exception, not the rule.

In a period of inflation real interest rates will be greater than nominal interest rates.

False

Quality changes in the automobile sector require the use of hedonics to extrapolate price changes.

False

The largest sector in the consumer price index market basket is food and beverage purchases.

False

When ranking movies by nominal box office receipts, what important fact is overlooked?

Prices, including those for movie tickets, have been rising over time.

The second largest category, by relative importance, in the CPI calculation is

Transportation

Persistent increases in the overall level of prices have been the norm

True

Price indexes allow comparisons of dollar figures over time and provide us a sense of how the economy is changing.

True

A 2009 Chevrolet model has more horsepower than the 2008 version and is included in the BLS basket of goods. BLS attempts to account for this change in the market basket by

adjusting the price of the good to account for the quality change.

When looking at a graph of nominal and real interest rates you notice the graph for nominal rates and the graph for real rates cross each other many times. From this you conclude

consumer prices sometimes rose and sometimes fell in the time frame represented on the graph.

When looking at a graph of nominal and real interest rates you notice that nominal rates always lie above real rates. From this you conclude

consumer prices were always rising in the time frame represented on the graph

Table 24-6 The table below relates to the economy of Mainland, where the typical consumer's market basket consists of 2 iPhones and 3 hamburgers. Year Price of an iPhone Price of a hamburger 2007 $400 $3 2008 $300 $5 2009 $325 $7 Refer to Table 24-6. The cost of the basket

decreased from 2007 to 2008 and increased from 2008 to 2009

A way of accounting for the changing quality of products when calculating price movements is called

hedonics

In addition to the consumer price index, the Bureau of Labor Statistics also calculates the

producer price index.

The hedonics applied by the Bureau of Labor Statistics links age of housing units to

rents.