ECO 201 HW 6

An increase in the price of bread produced domestically will be reflected in

both the GDP deflator and the consumer price index

The consumer price index tries to gauge how much incomes must rise to maintain

constant standard of living

Refer to Table 24-1. The cost of the basket in Year 1 was

$225

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

Refer to Table 24-4. To the nearest dollar, Will's Year 2 food expenditures in Year 1 dollars amount to

$5,524

If the nominal interest rate is 5 percent and the real interest rate is 7 percent, then the inflation rate is

-2%

As long as prices are rising over time, then

. the nominal interest rate exceeds the real interest rate

Refer to Table 24-1. If Year 1 is the base year, then the inflation rate in Year 2 was

4.4%

If the consumer price index was 100 in the base year and 106 in the following year, then the inflation rate was

6%

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.

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

The steps involved in calculating the consumer price index and the inflation rate, in order, are as follows:

Fix the basket, find the prices, compute the basket's cost, choose a base year and compute the index, and compute the inflation rate.

Refer to Table 24-2. The inflation rate was

Positive in Year 2 and Positive in Year 3

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

Economists use the term inflation to describe a situation in which

The economy's overall price level is high, but not necessarily rising

Which of the following statements is correct about the relationship between the nominal interest rate and the real interest rate?

The real interest rate is the nominal interest rate minus the rate of inflation

A dollar figure from 1908 is converted into 2008 dollars by dividing the 2008 price level by the 1908 price level, then multiplying by the 1908 dollar figure.

True

Consumer price index = (Price of basket of goods and services in current year / Price of basket in base year ) x 100

True

Substitution bias occurs because the CPI ignores the possibility of consumer substitution toward goods that have become relatively less expensive.

True

The Bureau of Labor Statistics surveys consumers to determine a fixed basket of goods.

True

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.

Which of the following is the correct formula for calculating the consumer price index?

[(price of basket of goods and services in current year/price of basket in base year)]× 100

The CPI and the GDP deflator

generally move together

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.

By far the largest category of goods and services in the CPI basket is

housing

The nominal interest rate tells you

how fast the number of dollars in your bank account rises over time

Refer to Table 24-2. The cost of the basket

increased from Year 1 to Year 2 and increased from Year 2 to Year 3

During periods of deflation, the nominal interest rate will be

lower than the real interest rate

The consumer price index is used to

monitor changes in the cost of living over time

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

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.

Refer to Table 24-4. Suppose Will's Year 1 food expenditures in Year 3 dollars amounted to $5,670. Suppose also that the real interest rate in Year 3 was 3 percent. Then, in Year 3,

the inflation rate was 8% and the nominal interest rate was 11%