Chapter 6 Economics
One subject of study for macroeconomics is
inflation, unemployment, economic growth,
A price index
is a mechanism to compare all prices in two different years; is the ratio of the price of a market basket in one year to the price of the market basket in a base year times 100
Suppose people on diets buy the bulk of the ground chicken and ground turkey sold in the US and they use either interchangeably as a substitute in recipes for ground beef. If the price of ground turkey rises and the price of ground chicken does not then the CPI will
overstate inflation because of the issue of substitution
Economists generally believe that relative to the true cost of living, the CPI
overstates it by a difference of about .8% (meaning that an official inflation rate of 1.8% is really only about 1%)
The majority of economists believe that the consumer price index
overstates the increase in the cost of living
A price index based upon the items purchased by firms is the
producer price index
On a graph of real gross domestic product over time, recessions appear as
relatively short and shallow drops on an otherwise increasing path
The consumer price index is computed by
the Bureau of Labor Statistics
Deflation occurs only when
the average price level falls
The inflation rate is
the percentage increase in the price index from one year to the next
With 125 million people working, 8 million out of work and looking for work, and 147 million neither working nor looking for work, the "encouraged worker effect" would be illustrated by people in the
147 million seeking but no attaining employment
With 125 million people working, 8 million out of work and looking for work, and 147 million neither working nor looking for work the unemployment rate would be
6.0% (8/(125+8)x100%
Which of the following can make the unemployment rate rise?
an increase in the number of people who are looking for work; a decrease in the number of people with jobs
In early 2005, inflation increase unexpectedly due to an increase in oil prices. This helped
borrowers
If a market basket was defined in 2006 and it cost 10,000 dollars to purchase the items in that basket in 2006, while it cost $11,000 to purchase those identical goods in 2007, then the base year is
2006
Economists consider deflation
dangerous, as it can lead to depression
Gross Domestic Product is counted using two methods: one which counts all the ways people _____ money and another which counts all the ways peoples _____ money
earn, spend
A consumer price index that has had the impact of food and energy prices removed is the
Core CPI
If the CPI were fixed then the fact that is wrong by .8 percentage points means that over a ten years period it is wrong by
more than 11 percentage points
A 15 year old that wants a job but can't find on is
not included at all in the unemployment rate
The magnitude of the annual overstatement of the CPI is approximately
one percentage point
The adjustments mad recently by the BLS to mitigate the overstatement of the cost of living by the CPI
reduced the estimated overstatement from 1.1% to .8%
Which of the following can make the unemployment rate fall?
a decrease in the number of people who are looking for work; an increase in the number of people with jobs
A depression is different from a recession in that
a depression is much worse
If a person is laid off from a job an told that they will be brought back as soon as the economy picks up and the demand for their products rises, then economists call this person
cyclically unemployed
If members of the labor force who had been classified as "unemployed" fail to find a suitable job and stop looking for work, their decision tends to make the unemployment rate
decrease as the labor force decreases
Inflation is measured using ______ in a price index
the percentage year to year increase
If a market basket was defined in 2006 and it cost $10,000 to purchase the items in that basket in 2006, while it cost $12,000 to purchase those identical goods in 2007, then the inflation rate from 2006 to 2007 is
(120-100)/100x100%=20%
If a market basket was defined in 2006 and it cost $10,000 to purchase the items in that basket in 2006, while it cost $12,000 to purchase those identical goods in 2007, then the price index for 2007 is
(12000/10000)x100=120
Estimates of the overstatement of cost of living by the CPI suggest the magnitude of the overstatement is roughly
1.0 percentage ponts
If a market basket was defined in 2006 and it cost $10,000 to purchase the items in that basket in 2006, while it cost $11,000 to purchase those identical goods in 2007, then the price index for the base year is
100
If a market basket was defined in 2006 and it cost $10,000 to purchase the items in that basket in 2006, while it cost $12,000 to purchase those identical goods in 2007, then the price index for the base year is
100
With 125 million people working, 8 million out of work and looking for work, and 147 million neither working nor looking for work, the "discouraged worker effect" would be illustrated by the people in the
8 million giving up in their search for work
In measuring Gross Domestic Product, goods produced by foreign firms in the United States are
Counted, but goods produced by American firms in foreign countries are not counted
Because the CPI overstates the rate of inflation, Cost of living adjustments for wages that are based on it will
cause these wages to rise more slowly than they otherwise would
The device uses by the BLS to adjust the market basket more frequently while still retaining the ability to make inflation calculations is
chain based indexing
The BLS has recently mad explicit adjustments in its CPI calculations to control for
consumer electronics quality improvement issues; issues relating to the frequency of market basket updates
With deflation people will
delay their purchases of goods in hopes prices will fall further
Of these, economists consider this the worst
depression
If the unemployment rate falls because the number of people not working but searching for work falls, economists would attribute this to the
discouraged worker effect
If the unemployment rate rises because the number of people not working but searching for work rises, economists would attribute this to the
encouraged worker effect
Over the years the consequences of the biased measurement of the CPI
increase exponentially
The consumer price index (CPI) is a heavily criticized measure of inflation because
it constantly overstates the increase in the cost of living
One problem with using Real Gross Domestic Product as a measure of social welfare is that
it fails to count home production
DVD writers allow people to record TV shows in a high quality format. They entered the market in 2002 at a price of $1,000. By 2003 they were under $500. By the time they had become part of the CPI market basket they are likely to be less than $250. Economists will argue that this type of issue
leads to the CPI overstating the rate of inflation
A CPI miscalculation that overstates its increase by .8 percentage points will cause
the personal exemption to rise too quickly; social securities maximum taxable earnings to rise too quickly; the poverty line to rise too quickly; standard deduction to rise too quickly; tax brackets cutoffs to rise too quickly
If a market basket was defined in 2006 and it cost $10,000 to purchase items in that basket in 2006, while it cost $12,000 to purchase those identical goods in 2007, then the inflation rate from 2005 to 2006 is
unknown given this data
If a market basket was defined in 2006 and it cost $10,000 to purchase the items in that basket in 2006, while it cost $11,000 to purchase those identical goods in 2007, then the inflation rate from 2005 to 2006 is
unknown given this data
If a market basket was defined in 2006 and it cost $10,000 to purchase the items in that basket in 2006, while it cost $11,000 to purchase those identical goods in 2007, then the inflation rate from 2006 to 2007 is
(110-100)/100 x100%=10%
If a market basket was defined in 2006 and it cost $10,000 to purchase items in that basket in 2006, while it cost $11,000 to purchase those identical goods in 2007, then the price index for 2007 is
(11000/10000)x100=110
One of the reasons that Real Gross Domestic Product is not synonymous with social welfare is
Domestic production (cooking, laundry and such) are not counted; it ignores the values of leisure; it treats all spending the same (spending on military hardware is treated the same as spending on education); environmental quality is ignored; the underground economy (unreported and illegal income and sales) is not counted
The political problems associated with fixing the CPI are that
It would mean that personal income taxes would rise; it would mean that benefits to the poor would fall; it would mean that social security benefits would fall
According to the Bureau of Labor Statistics, the Consumer Price Index was
Never intended to measure increases in the cost of living but many use it that way
If a person is unemployed because their industry has moved to another country, economists refer to this person as
structurally unemployed
In 2005, General Motors announced a 20% reduction in its staffing levels and the closure of many assembly plants. Those laid off as a result would likely be classified as
structurally unemployed
When estimating GDP using the income approach, aggregate income is adjusted by
subtracting net income earned abroad; adding depreciation; adding indirect business taxes
to an economists a "market basket" is made up of
the goods average people buy and the quantities in which they buy them
The reason that only final sales are counted in GDP is
to avoid double counting goods that are sold so as to be resold
One of the consequences of the overstatement of the CPI is that
Social security taxes are higher than they would be otherwise; personal income taxes are lower than they would otherwise be; social security payments are higher than they would otherwise be; the poverty line is higher than it would otherwise be
Which of the following is not a reason that the CPI overstates the cost of living?
There are two frequent updates of the market basket, substitution into nearly equivalent goods is assumed to be more common than it is
Real Gross Domestic Product is Gross Domestic Product
adjusted for inflation
A reason given why the CPI overstates the cost of living is it
makes no attempt to control for substitution to cheaper goods; makes no attempt to control for the fact that sales often occur on holidays; makes no attempt to control for quality improvements except in consumer goods; inadequately deals with updates in product lines for existing goods; updates the market basket infrequently thereby missing the steep price decline in the early adoption period; BLS audits prices in the same types of stores, rather than shift to cheaper outlets
In the 1970s and 1980s Walmart entered several markets outside of its home base of Arkansas. As a result it brought lower prices on a variety of goods. That the Bureau of Labor Statistics id not send its shoppers into these new stores until there was survey led to the CPI
overstating inflation because they were missing "where people shop"
In the 1990s and 2000s Walmart entered the grocery store sector in several US cities and as a result it brought lower prices in food. That the Bureau of Labor Statistics did not send its shoppers into these new stores in a timely fashion led to the CPI
overstating inflation because they were missing "where people shop"
With 125 million people working, 8 million out of work and looking for work, and 147 million neither working nor looking for work, "underemployment" would be illustrated by
part of the 125 million holding part time jobs when they were qualified for full time jobs; part of the 125 million holding low skill jobs when they were qualified for high skilled jobs
