Econ 104 Exam #2

ndicate whether the following statement is true or false and why. ​"A wage rising slower than the rate of inflation is actually​ falling." A. True. If wages are increasing slower than the average price of goods and​ services, purchasing power falls. B. True. If wages are increasing slower than the average price of goods and​ services, purchasing power increases. C. False. A higher wage decreases purchasing power regardless of inflation. D. False. A higher wage increases purchasing power regardless of inflation.

A True. If wages are increasing slower than the average price of goods and​ services, purchasing power falls.

Suppose that the inflation rate LOADING... turns out to be much higher higher than most people expected. In that​ case, A. a borrower will gain gain from the situation while a lender will lose lose. B. both borrower and lender will gain from the situation. C. both borrower and lender will lose in this situation. D. a lender will gain gain from the situation while a borrower will lose lose.

A. a borrower will gain gain from the situation while a lender will lose lose.

The difference between a nominal variable and a real variable is that A. nominal variables are calculated in​ current-year prices and the real variables are measured in dollars of the base year for the price index to correct the effects of inflation. B. real variables are divided by the price index and multiplied by 100 to obtain nominal variables. C. nominal variables are economic variables that are adjusted for​ inflation, whereas real variables are valued in​ today's dollars. D. real variables are calculated in​ current-year prices and the nominal variables are measured in dollars of the base year to adjust for the effects of inflation.

A. nominal variables are calculated in​ current-year prices and the real variables are measured in dollars of the base year for the price index to correct the effects of inflation.

Consumer Price Index (CPI) definition

An average of the prices of the goods and services purchased by the typical urban family of four.

If the economy is experiencing​ deflation, A. the nominal interest rate will be higher than the real interest rate. B. the nominal interest rate will be lower than the real interest rate. C. the nominal interest rate will be equal to the real interest rate. D. high nominal interest rates inflict serious losses on both household and business borrowers.

B. the nominal interest rate will be lower than the real interest rate. Explination: you will be subtracting a negative from the nominal so it will make the real greater than nominal

The price index which is used to measure changes in the cost of living is the A. Retail Price Index. B. GDP Deflator. C. Consumer Price Index​ (CPI). D. Producer Price Index​ (PPI).

C. Consumer Price Index​ (CPI).

Briefly explain whether you agree or disagree with the following​ statement: ​"I don't believe the government price statistics. The CPI for 2016 was 212​, but I know that the inflation rate ​couldn't have been as high as 112 percent in​ 2016." A. Agree. A CPI of 212 212 is a 112 112​% increase from​ 100, which is impossible. B. Disagree. The inflation rate is always the same as the natural rate of​ unemployment, which is about​ 5%. C. Disagree. The inflation rate is the percentage increase in the price level from the previous​ year, not the base year. D. Agree. A CPI of 212 212 is a 112 112​% increase in the price level from the base year. The inflation rate in 2016 is 112 112​%.

C. Disagree. The inflation rate is the percentage increase in the price level from the previous​ year, not the base year.

In the fall of​ 2017, Apple introduced two new models of its iPhone. The new models had faster processors and better cameras than the previous model and sold for higher prices. How did the introduction of the new models of the iPhone affect the​ CPI? A. The CPI increases due to the substitution bias. B. The CPI decreases due to the new product bias. C. The CPI increases due to the decrease in quality bias. D. The CPI does not change.

D. The CPI does not change. Explanation: Until the BLS updates the market basket of goods used to compute the CPI to include the new iPhone​ models, the introduction of the new iPhones will have no effect on the CPI. ​However, this does not account for the fact that the CPI is potentially biased. That​ is, unless the CPI is updated​ frequently, the true level of inflation may be overstated or understated. Since the improved quality was met with higher​ prices, the CPI would understate the true value of inflation until the measure was updated.

Real interest rate

nominal interest rate minus the inflation rate

Inflation Rate definition from the homework

the percentage increase in the price level from one year to the next

Nominal interest rate

the stated interest rate