Econ 2301 Ch. 7 Midterm Review Lee College Mrs. Kar

The CPI measures the average prices paid by __________ for _________. A.urban consumers; a fixed basket of consumption goods and services B.urban consumers; the average basket of goods and services they buy C.all consumers; housing, transportation, and food D.everyone who earns an income; the necessities of life

A

How to calculate market basket total cost for a base year

price time quantity sum for all items gives the total

If nominal GDP increases by 5 percent a year and the GDP price index rises by 2 percent a year, then real GDP increases by ________. A.7 percent a year B.3 percent a year C.2.5 percent a year D.10 percent a year

B Growth in nominal GDP can be separated into growth in the GPD price index plus growth in real GDP.

When the price level_______, the inflation rate ______. A. rises rapidly; increases B. rises rapidly; is high C. falls; is zero D. rises slowly; falls

B When the price level rises rapidly, the inflation rate, which is the growth rate of the price level, is high

The CPI bias arises from all of the following items except________. A.the introduction of new goods and services B.the improved quality of goods C.the goods and services bought by poor people D.consumers' responses to price changes

C The CPI's biases do not include anything specific to the goods and services purchased by po or people.

When the price level is rising at ______and the real interest rate is 1 percent a year, the nominal interest rate is 3 percent a year. A.4 percent a year B.3 percent a year C.2 percent a year D. 1 percent a year

C The nominal interest rate equals the real interest rate plus the inflation rate, so if the nominal interest rate is 3 percent a year and the real interest rate is 1 percent a year, the inflation rate must be 2 percent a year.

The BLS reported that the CPI in July 2010 was 226. This news tells you that_______. A. consumer prices during July were 226 percent higher than they were during the base year B. the CPI inflation rate in July was 26 percent a year C. consumer prices rose by 26 percent during the month of July D. the prices of consumption goods and services have risen, on average, by 126 percent since the base year

D In the reference base period the CPI equals 100, so if it is 226 in July 2010, prices have risen, on average, 226 - 100, or 126 percent.

Read Eye on Box Office Hits and using BLS data for the CPI in 1982 and 1997, determine which movie had the greater real box office revenues, E.T.: The Extra-Terrestrial, which earned $435 million in 1982 or Titanic, which earned $601 million in 1997.

From the BLS, the CPI in 1982 = 96.5 and the CPI in 1997 = 160.5. To convert the dollars earned by E.T.: The Extra-terrestrial into 1997 dollars, multiply the 1982 dollars, $435 million, by the 1997 CPI and divide by the 1982 CPI. This procedure gives $435 million × 160.5 ÷ 96.5, which is $723 million. This result shows that E.T.: The Extra‑Terrestrial had greater real box office than Titanic.

The table shows the quantities of the goods that Suzie bought and the prices she paid during two consecutive weeks. Suzie's CPI market basket contains the goods she bought in Week 1. Calculate the cost of Suzie's CPI market basket in Week 1 and in Week 2. What percentage of the CPI market basket is gasoline? Calculate the value of Suzie's CPI in Week 2 and her inflation rate in Week 2.

Susie's CPI market basket contains 11 cups of coffee, 1 DVD, and 15 gallons of gasoline. The cost of her market basket in Week 1 is (11 cups×$3.25 a cup) + (1 DVD×$25 each) + (15 gallons of gasoline× $2.50 a gallon), which is $35.75 + $25.00 + $37.50, or $98.25. The cost of her market basket in Week 2 is (11 cups×$3.25 a cup) + (1 DVD×$12.50 each) + (15 gallons of gasoline×$3.00 a gallon), which is $35.75 + $12.50 + $45.00, or $93.25. Her market basket in Week 2 does not include concert tickets because she purchased no tickets in the base week. Gasoline accounted for $37.50 of her $98.25 market basket, which is ($37.50÷$98.25) ×100 or 38.2 percent. Her CPI in Week 2 is equal to [$93.25 ÷$98.25] ×100, which is equal to 94.9. The CPI in the base week is 100, so the inflation rate in week 2 equals ([94.9 −100.0] ÷100) ×100, which is −5.1 percent.

In 2015, Annie, an 80-year-old, is telling her granddaughter Mary about the good old days. Annie says that in 1935, you could buy a nice house for $15,000 and a jacket for $5. Mary says that in 2015 such a house costs $220,000 and such a jacket costs $70. The CPI in 1935 was 16.7 and in 2015 it was 218.1. Which house and which jacket have the lower prices?

The 2015 house price that is equivalent to $15,000 price in 1935 equals the CPI in 2015 divided by the CPI in 1935 and then multiplied by $15,000. So, the 2015 house price is (218.1 ÷16.7) ×$15,000, which is $195,898. The price for a house of $15,000 in 1935 is lower than its price in 2015. The 2015 jacket price that is equivalent to $5 in 1935 equals the CPI in 2015 divided by the CPI in 1935 and then multiplied by $5. So, the 2015 jacket price is (218.1 ÷16.7) ×$5, which is $65. So, the $5 for a jacket in 1935 is the lower priced jacket.

see question 7 on review for table and other questions/ answers

solve on review

Pete is a student who spends 10 per cent of his expenditure on books and supplies, 30 percent on tuition, 30 percent on rent, 10 percent on food and drink, 10 percent on transportation, and the rest on clothing. The price index for each item was 100 in 2006. The t able shows the prices in 2016. What is Pete's CPI in 2016? (Hint: The contribution of each item to the CPI is its price weighted by its share of total expenditure.) Books - $172.6 Tuition - $169.0 Rent - $159 Food - 129.8 Car - $115.4 Clothing - $92.9

Pete's CPI in 2016 equals (0.10 × 172.6) + (0.30 × 169.0) + (0.30 × 159.0) + (0.10 × 129.8) + (0.10 × 115.4) + (0.10 × 92.9) = 149.5