ECON QUIZ 3

In the typical postwar recession real GDP falls no more than about ___ percent.

5

GDP deflator

Nominal GDP/Real GDP x 100

When you grow prices to a later year...

use division method price (old) x (CPI(current)/CPI(old))

If the CPI went from 100 last year to 110 this year, and if a newspaper's nominal price was $1 last year, in this year's values it would be worth ___.

(110/100)•$1.00 To put a nominal price from one year in terms of prices in another year, we multiply by the ratio of the CPIs for the two years. In addition, note how last year's values cancel out -- they're in the numerator ($1 for a newspaper last year) and in the denominator (100 for the CPI). The result is in terms of values for this year -- the 110 for the CPI. Thus, the nominal price is converted from one year's values to another.

Say that the CPI this year is 200 and that last year it was 180. The nominal price of a gallon of milk was $4.00 last year. After adjusting for inflation, what would it be in today's prices?

(200/180)*$4.00 As prices have risen from last year to this year, you would expect the price of milk to be larger if it increased with inflation (which is what we're doing if we're converting a nominal price from one year). Thus, you use the ratio of the CPI values.

What was the real interest rate for a consumer purchasing a house in 2020? They'll be taking out a home loan, often called a mortgage.

. The rate of inflation for consumers this year is 4% while the nominal interest rate (mortgage rate) is 6%, so you have 6% - 4% = 2%.

Let's say that over the last year your nominal salary increased by 4% and that the CPI increased by 1%. Then your real salary increased by ___.

3% In this case, you're earning 4% more dollars while the prices of things you purchase (represented by the CPI) rises by 1%. Thus, while you have more dollars, some of them are used to purchase more expensive items. Thus, your real income rose by 3% -- the increased number of dollars you earn (4%) less how much more expensive goods are (1%). More generally, real wages change by %change nominal wage - inflation (and the latter is the percent change in prices).

Someone would use ___ when they have the rate of inflation and want to compute ___ prices.

Here, you're using the subtraction method -- you find the percent change in something's nominal price and subtract off the rate of inflation.

How could fiscal policy be used to speed up economic growth?

If taxes fall, consumers and firms have more to spend, so real GDP grows more rapidly. Or, if government purchases (G) rise, real GDP grows directly as these purchases are part of real GDP. Or, if transfers rise, individuals have more funds and as their spending grows, real GDP grows more quickly.

One would ___ when you're converting a nominal price from one year to another.

In this case, you'd use the division method to compute the new price. Thus, you would divide.

Why would one care about the core CPI?

It removes particularly volatile CPI components from the regular CPI.

Say that the price of cat food increased by 5% one year and the CPI increased by 2%. Then you know that the real price of cat food changed by __.

Since we're given rates of change, to compute how much the real price of cat food changed we simply subtract the nominal rate of increase less the inflation rate. Thus, 5% - 2% = 3%.

. What would the Fed do if it wished to speed up economic growth?

The Fed would lower interest rates which in turns makes it easier to borrow money for big purchases, like for cars, houses, and capital goods. As a result, spending on these goods increases and thus real GDP grows more quickly.

Is the value of the GDP deflator in 2016 correct?

The GDP deflator = (nominal GDP / real GDP) • 100. Since real and nominal GDP are equal to each other, this value is correct.

What was the percentage change in the real price of apples from 2019 to 2020 for consumers? 2019 Price= 0.95 2020 Price= 1.00 inflation/% change in CPI = 4%

The easiest way to compute this is to first find the percentage change in the nominal price of apples from 2019 to 2020, which is (($1.00 - $.95)/$.95) • 100 = 5.26%. Next, inflation for consumers from 2019 to 2020 was 4%. Thus, after accounting for inflation, the price of apples rose by 5.26% - 4% = 1.26%, or 1.3% when you're using 1 decimal point.

What was the inflation rate for the entire economy from 2016 to 2017?

The entire economy's inflation rate is measured with the percentage change in the GDP deflator (you use the CPI for consumer inflation). You can read this directly from the table: 1.25%. To calculate it, you have ((101.25 - 100)/100) • 100 = 1.25%

Is the inflation rate for consumers from 2016 to 2017 correct?

The inflation rate for consumers is the percentage change in the CPI; in this case it would be ((244.8 -240.0)/240) • 100 = 2.0%. Thus, the inflation rate reported in the table is correct.

What is the real interest rate on a car loan for consumers in 2017? Assume that the car was purchased that year.

This is the nominal interest rate - the inflation rate (measured with the percentage change in the CPI as this is with consumers), or 7.0% - 2.0% = 5.0%.

What was the rate of economic growth from 2019 to 2020?

This is the percentage change in real GDP, or ((18.52 - 18.51)/18.51) • 100 = 0.054%, or .1% with 1 digit

Deflate the nominal price of apples from 2020 for consumers (that is, convert the 2020 nominal price to the base year of the CPI). Please use two decimal place for this answer. Nominal 2020 price: $1 BASE YEAR: 100 (ALWAYS 100) CPI 2020; 260

This is the same as the division method, with the addition that you're converting to the base period of the CPI, when it has a value of 100. Note that we don't have the year when this occurred, but we don't need that. As you've got a price from 2020 and are converting to an earlier year when prices were lower, you would want to shrink it down. Thus, you would have $1.00 • (100/260) = $.3846, or $.38 when using 2 decimal places.

Please convert the nominal price for an apple from 1990 to the prices of 2020. Assume that a consumer purchases it. 1990 price= $0.5 CPI 1990= 130 CPI 2020= 260

You would want to enlarge this price as prices rose from 1990 to 2020. Thus, you would have $.50 • (260/130) = $1.00. Also, note how values from 1990 are cancelled out in the calculation with $.50 in the numerator and 130 in the denominator. Finally, you use the CPI and not the GDP deflator as a consumer purchased this item.

Which is the most accurate description of a depression?

a really bad recession

I came across a report that found that from 2010 to 2019 the real price of the average airline ticket fell by 8%. What does this mean?

compared to other consumer goods, flying became cheaper Recall how the %∆real price = %∆nominal price - inflation. If the percent change in a real price is negative, this means that inflation was larger than the percent change in the nominal price of this good. Thus, an airline ticket became cheaper compared to other consumer goods.

In the years since 1970, which is longer in the U.S.?

expansions

A recession is defined as an event that lasts at last 6 months where real GDP falls at least 2%.

false

As this question is being written, Congress is considering increasing transfer payments to help speed economic growth as the economy climbs out of the Covid Recession. This would be an example of the dual mandate being used.

false

A recession is the same thing as deflation.

false Deflation is a fall in prices (measured by either the CPI or the GDP deflator), while a recession is basically a fall in real GDP.

A recession is simply a period of slower growth in the economy?

false, a recession is a period of decline in the economy. Recall the official definition: "A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."

Which of the following tends to be more stable from year to year?

inflation measured by the core CPI

inflation rate for entire economy

percent change in GDP deflator

Economic growth is the

percentage change in real GDP (current-base)/base) x 100

The inflation rate for consumers is the

percentage change in the Consumer Price Index (CPI) (current-base)/base) x 100

Which of the following would be used to track the business cycle?

real GDP

If the inflation rate was 2% and the dollars people earned at work was unchanged, then ___.

real wages fell

Why is the current value of the GDP deflator so much smaller than the current value of the CPI?

the CPI's base year was years before the GDP deflator's base year

A real interest rate is

the nominal (not adjusted for inflation) interest rate minus the rate of inflation.

Say that you wanted to compute the market basket in each of 1990, 2000, 2010, 2019, and 2020. when you compare your calculations, what is kept constant over these years?

the number of goods in the market basket

When you shrink prices to a past year...

use deflating method price (current) x (CPI(old)/CPI(current))