Econ midterm 2 questions 11
The CPI and the GDP deflator
generally move together.
In 1931, President Herbert Hoover was paid a salary of $75,000. Government statistics show a consumer price index of 15.2 for 1931 and 237 for 2015. President Hoover's 1931 salary was equivalent to a 2015 salary of about
$1,169,408.
Mia Denton was an accountant in 1943 and earned $21,000 that year. Her son is an accountant too and he earned $270,000 this year. Suppose the price index was 18.3 in 1943 and 20.2 in the current year.Mia's 1943 income in current year dollars is
$23,180.
Mia Denton was an accountant in 1943 and earned $21,000 that year. Her son is an accountant too and he earned $270,000 this year. Suppose the price index was 18.3 in 1943 and 20.2 in the current year.
$244,604.
Nate collected Social Security payments of $220 a month in Year 1. If the price index rose from 90 to 108 between Year 1 and Year 2, then his Social Security payments for Year 2 should have been
$264.
If the CPI was 90 in 1975 and is 225 today, then $100 today purchases the same amount of goods and services as
$40.00 purchased in 1975.
Suppose a basket of goods and services has been selected to calculate the CPI and Year 1 has been selected as the base year. In Year 1, the basket's cost was $50; in Year 2, the basket's cost was $52; and in Year 3, the basket's cost was $55. The value of the CPI in Year 3 was
110.0.
If the consumer price index was 100 in the base year and 103 in the following year, then the inflation rate was
3 percent.
The price index was 105 in Year 1 and 111 in Year 2. What was the inflation rate?
5.7 percent
The CPI is more commonly used as a gauge of inflation than the GDP deflator is because the
CPI better reflects the goods and services bought by consumers.
Which of the following statements is correct about the relationship between inflation and interest rates?
In order to fully understand interest rates, we need to know how to correct for the effects of inflation.
Suppose OPEC succeeds in raising world oil prices by 300 percent. This price increase causes inventors to look at alternative sources of fuel for internal-combustion engines. A hydrogen-powered engine is developed which is cheaper to operate than gasoline engines. Which problems in the construction of the CPI does this situation represent?
Substitution bias and introduction of new goods
Which of the following statements is correct?
The CPI can be used to compare dollar figures from different points in time.
What basket of goods and services is used to construct the CPI?
The goods and services that are typically bought by consumers as determined by government surveys
If the consumer price index was 93 in Year 1, 97 in Year 2, and 100 in Year 3, then the base year must be
Year 3.
If Year 1 is the base year and Year 2 is the following year, then the inflation rate in Year 2 equals
[(CPI in Year 2 − CPI in Year 1)/CPI in Year 1] × 100.
The CPI is a measure of the overall cost of the goods and services bought by
a typical consumer, and the CPI is computed and reported by the Bureau of Labor Statistics.
An increase in the price of bread produced domestically will be reflected in
both the GDP deflator and the consumer price index.
Changes in the quality of a good
can lead to either an increase or a decrease in the value of a dollar.
In the United States, if the price of imported oil rises so that the prices of gasoline and heating oil rise, then the
consumer price index rises much more than does the GDP deflator.
One of the widely acknowledged problems with using the consumer price index as a measure of the cost of living is that the CPI
fails to account for the introduction of new goods.
For any given year, the CPI is the price of the basket of goods and services in the
given year divided by the price of the basket in the base year, then multiplied by 100.
In the CPI, goods and services are weighted according to
how much consumers buy of each good or service.
The CPI differs from the GDP deflator in that
increases in the prices of foreign produced goods that are sold to U.S. consumers show up in the CPI but not in the GDP deflator.
When the quality of a good improves while its price remains the same, the purchasing power of the dollar
increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
During periods of deflation, the nominal interest rate will be
lower than the real interest rate.
Consider a small economy in which consumers buy only two goods: pretzels and cookies. In order to compute the consumer price index for this economy for two or more consecutive years, we assume that
neither the number of pretzels nor the number of cookies bought by the typical consumer changes from year to year.
Core CPI is
the CPI excluding food and energy.
Two common measures of the overall level of prices are
the GDP deflator and the consumer price index.
Suppose that in 2018, the producer price index increases by 1.5 percent. As a result, economists most likely will predict that
the consumer price index will increase in the future.
If the price of Italian shoes imported into the United States increases, then
the consumer price index will increase, but the GDP deflator will not increase.
As long as prices are rising over time, then
the nominal interest rate exceeds the real interest rate.
If the nominal interest rate is 5 percent and the real interest rate is 7 percent, then the inflation rate is
−2 percent.
