Econ 161: Chapter 11

Amount in Today's Dollars Formula

Amount in year T dollars X (Price level today/Price level in year T)

Real Interest Rate

The interest rate corrected for the effects of inflation.

Suppose Valerie is a cinephile and buys only movie tickets. Valerie deposits $3,000 in a bank account that pays an annual nominal interest rate of 5%. Assume this interest rate is fixed—that is, it won't change over time. At the time of her deposit, a movie ticket is priced at $10.00. Initially, the purchasing power of Valerie's $3,000 deposit is ________ movie tickets.

300 tickets. Purchasing power = (initial deposit / price) = ($3,000 / $10 per movie ticket) = 300 tickets.

Producer Price Index

A measure of the cost of a basket of goods and services bought by firms.

Consumer Price Index (CPI)

A measure of the overall cost of goods and services bought by a typical consumer.

Real Interest Rate Formula

Nominal Interest Rate - Inflation Rate.

When the rate of inflation is less than the interest rate on Valerie's deposit, the purchasing power of her deposit ___________ over the course of the year? (remains the same, rises, falls)

Rises

Indexation

The automatic correction by law or contract of dollar amount for the effect of inflation.

Nominal Interest Rate

The interest rate as usually reported without a correction for the effects of inflation.

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 inflation

a. the CPI overstates inflation

The largest component in the basket of goods and services used to compute the CPI is: a. food and beverages b. housing c. medical care d. apparel

b. Housing

The CPI is a measure of the overall cost of: a. the goods and services produced in the economy. b. the goods and services purchased by a typical consumer. c. the stocks on the New York Stock Exchange. d. the inputs purchased by a typical producer.

b. the goods and services purchased by a typical consumer.

Suppose the typical household spends $3,500 on goods and services during the month of January, and $4,300 on the same goods and services in February. Using January as the base period, what is the consumer price index for February?: a. 55.1 b. 151.4 c. 122.9 d. 81.4

c. 122.9

The table below lists the per gallon prices of gas and milk for the months of April, May, and June. Assume that the typical consumer buys 60 gallons of gas and 4 gallons of milk each month, and that April is the base period. Month Price of Gas Price of Milk April $2.00 $3.50 May $3.50 $3.25 June $3.85 $3.58 What is the consumer price index for May? a. 123 b. 132 c. 166 d. 60

c. 166

The consumer price index measures approximately the same economic phenomenon as: a. nominal GDP b. real GDP c. the GDP deflator d. the unemployment rate

c. the GDP deflator

If the consumer price index 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

You deposit $2,000 in a savings account, and a year later you have $2,100. Meanwhile, the consumer price index rises from 200 to 204. In this case, the nominal interest rate is _________ percent, and the real interest rate is _______ percent. a. 1,5 b. 3,5 c. 5,1 d. 5,3

d. 5, 3 The nominal interest rate measures the change in dollar amounts, so an increase from $2,000 to $2,100 represents a nominal interest rate of, or 5%. The increase in CPI from 200 to 204 reflects 2% inflation; therefore, the real interest rate (equal to the nominal interest rate minus the inflation rate) is equal to.

Which of the following agencies calculates the CPI? a. the Department Of Weight and Measurements b. the National Price Board c. the Congressional Budget Office d. the Bureau of Labor Statistics

d. the Bureau of Labor Statistics

If a Pennsylvania gun manufacturer raises the price of rifles it sells to the U.S. Army, its price hikes will increase: a. both the CPI and the GDP deflator. b. neither the CPI nor the GDP deflator. c. The CPI but not the GDP deflator. d. The GDP deflator but not the CPI.

d. the GDP deflator but not the CPI.

An increase in the price of a Japanese-made phone that is popular among U.S. consumers. Does it show in GDP deflator or CPI?

CPI

Inflation Rate in year 2 formula

( [CPI in year 2 - CPI in year 1] / CPI in year 1) X 100.

Consumer Price Index Formula

(Price of basket of goods and services in current year/Price of basket in base year) X 100

A decrease in the price of a Waterman Industries deep-water reel, which is a commercial fishing product used for deep-sea fishing, made in the U.S., but not bought by U.S. consumers. Does it show in GDP deflator or CPI?

GDP Deflator

Inflation Rate

The percentage change in the price index from the preceding period.

When the consumer price index falls, the typical family has to spend fewer dollars to maintain the same standard of living. True or False.

True.