Problem Set 5
A small nation of 10 people produce and consume only cookies and milk. Assuming that the average market basket of goods contains 1 box of cookies and 3 containers of milk, calculate the CPI for the year 2022. Assume 2021 is the base year. Year - 2021 Price of Box of Cookies - $40 Price of Container of Milk - $10 Year - 2022 Price of Box of Cookies - $60 Price of Container of Milk - $12 The value of the CPI in 2022 is ______, and the annual rate of inflation (annual percentage increase in CPI) in 2022 is _______. a. 137.14, 37.14% b. 188, 88% c. 176, 76% d. 500, 5%
a. 137.14, 37.14%
Which do you think has a greater effect on the CPI: a 10% increase in the price of chicken or a 10% increase in the price of caviar? Why? a. a 10% increase in the price of chicken since chicken would be a greater component of the average consumer's market basket b. a 10% increase in the price of chicken since chicken has a more inelastic demand c. a 10% increase in the price of chicken since chicken is relatively inexpensive compared to caviar d. a 10% increase in the price of caviar since caviar is relatively expensive compared to chicken
a. a 10% increase in the price of chicken since chicken would be a greater component of the average consumer's market basket
Because consumers can sometimes substitute cheaper goods for those that have risen in price... a. the CPI overstates inflation b. the CPI understates inflation c. the GDP deflator overstates inflation d. the GDP deflator understates deflation
a. the CPI overstates inflation
Consider an economy that produces only chocolate bars. In year 1, the quantity produced is 3 bars and the price is $4. In year 2, the quantity produced is 4 bars and the price is $5. In year 3, the quantity produced is 5 bars and the price is $6. Year 1 is the base year. What is nominal GDP for year 1, year 2, year 3? a. $4, $5, $6 b. $12, $20, $30 c. $12, $16, $20 d. $15, $20, $25
b. $12, $20, $30
If the price of a hotdog is $2 and the price of a hamburger is $4, then 30 hotdogs contribute as much to GDP as ______ hamburgers. a. 5 b. 15 c. 30 d. 60
b. 15
Consider an economy that produces only chocolate bars. In year 1, the quantity produced is 3 bars and the price is $4. In year 2, the quantity produced is 4 bars and the price is $5. In year 3, the quantity produced is 5 bars and the price is $6. Year 1 is the base year. What is real GDP for year 1, year 2, year 3? a. $4, $5, $6 b. $12, $20, $30 c. $12, $16, $20 d. $15, $20, $25
c. $12, $16, $20
Consider an economy that produces only chocolate bars. In year 1, the quantity produced is 3 bars and the price is $4. In year 2, the quantity produced is 4 bars and the price is $5. In year 3, the quantity produced is 5 bars and the price is $6. Year 1 is the base year. What is the GDP Deflator for year 1, year 2, year 3? a. 4, 5, 6 b. 400, 500, 600 c. 100, 125, 150 d. 100, 400, 500
c. 100, 125, 150
The CPI measures approximately the same economic phenomenon as... a. nominal GDP b. real GDP c. GDP deflator d. unemployment rate
c. GDP deflator
The Consumer Price Index is defined as... a. nominal GDP/real GDP X 100 b. a measure of the cost of a basket of goods and services bought by firms c. a measure of the overall cost of the goods and services bought by a typical consumer d. the automatic correction by law or contract of a dollar amount for the effects of inflation
c. a measure of the overall cost of the goods and services bought by a typical consumer
Explain why an economy's income must equal its expenditure. a. because government will always ensure consumer spending b. because government will always ensure investment spending c. because a dollar spent is a dollar earned d. because the government taxes both saving and expenditure
c. because a dollar spent is a dollar earned
An American buys a pair of shoes made in Italy. How do the U.S. national income accounts treat the transaction? a. net exports and GDP both rise b. net exports and GDP both fall c. net exports fall, while GDP is unchanged d. net exports are unchanged, while GDP rises
c. net exports fall, while GDP is unchanged
If the CPI is 200 in year 1980 and 300 today, then $600 in 1980 has the same purchasing power as ________ today. a. $400 b. $500 c. $700 d. $900
d. $900
A small nation of 10 people produce and consume only cookies and milk. Assume below is data showing the actual prices and quantities produced and sold in the following years. Calculate the GDP deflator for the year 2022. Assume 2021 is the base year. Year - 2021 Price of Cookies - $40 Quantity of Cookies - 10 Price of Milk - $10 Quantity of Milk - 30 Year - 2022 Price of Cookies - $60 Quantity of Cookies - 12 Price of Milk - $12 Quantity of Milk - 50 The value of the GDP deflator in 2022 is ______, and the annual rate of inflation (annual percentage increase in GDP deflator) in 2022 according to the GDP deflator is _______. a. 137.14, 37.14% b. 1320, 132% c. 980, 98% d. 134.69, 34.69%
d. 134.69, 34.69%
Which of the following does NOT add to U.S. GDP? a. Air France buys a plane from Boeing, the U.S. aircraft manufacturer. b. General Motors builds a new auto factory in North Carolina. c. The city of New York pays a salary to a policeman. d. The federal government sends a Social Security check to your grandmother.
d. The federal government sends a Social Security check to your grandmother.
If the price of imported French wine rises, is the CPI or GDP deflator affected more? Why? a. the GDP deflator since consumers may not drink imported wine b. the GDP deflator since it is a part of net exports c. the CPI since the GDP deflator doesn't count consumption goods d. the CPI since it would not be a part of the GDP deflator- imported goods are not included in GDP
d. the CPI since it would not be a part of the GDP deflator- imported goods are not included in GDP