ECON H6

The table below pertains to an economy with only two goods -- books and calculators. The fixed basket consists of 5 books and 10 calculators. Year Price of books Price of calculators 2006 $24 $8 2007 30 12 2008 32 15 Refer to Table 24-4. Using 2006 as the base year, the consumer price index is

100 in 2006, 135 in 2007, and 155 in 2008.

Table 23-3 Prices and Quantities Year Price of Sandwiches Quantity of Sandwiches Price of Magazines Quantity of Magazines 2006 $4.00 100 $2.00 180 2007 $5.00 120 $2.50 200 2008 $6.00 150 $3.50 200 Refer to Table 23-3. Using the GDP deflator to measure the average level of prices and using 2006 as the base year, the economy's inflation rate is

25 percent for 2007 and 28 percent for 2008.

Table 24-4 The table below pertains to an economy with only two goods -- books and calculators. The fixed basket consists of 5 books and 10 calculators. Year Price of books Price of calculators 2006 $24 $8 2007 30 12 2008 32 15 Refer to Table 24-4. Using 2006 as the base year, the inflation rate is

35 percent for 2007 and 14.8 percent for 2008.

If the consumer price index was 100 in the base year and 107 in the following year, the inflation rate was

7 percent.

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

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

Let 2004 be the base year; then the inflation rate in 2005 is:

[(CPI2005 - CPI2004)/CPI2004)] x 100

The producer price index measures the cost of a basket of goods and services

bought by firms.

In the calculation of the CPI, coffee is given greater weight than tea if

consumers buy more coffee than tea.

You know that a candy bar cost five cents in 1962. You also know the CPI for 1962 and the CPI for today. Which of the following would you use to compute the price of the candy bar in today's prices?

five cents*(today's CPI/1962 CPI)

The CPI is a measure of the overall cost of

goods and services bought by a typical consumer.

When the consumer price index rises, the typical family

has to spend more dollars to maintain the same standard of living.

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

housing

When the quality of a good improves, the purchasing power of the dollar

increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.

Suppose GDP consists of wheat and rice. In 2005, 20 bushels of wheat are sold at $4 per bushel, and 10 bushels of rice are sold at $2 per bushel. In 2004, the price of wheat was $2 per bushel and the price of rice was $1 per bushel. Using 2004 as the base year, it follows that, for 2005,

nominal GDP is $100, real GDP is $50, and the GDP deflator is 200.

Suppose the price of gasoline increases rapidly, and that consumers respond by buying a smaller quantity of gasoline. The consumer price index

overstates the price increase due to the so-called substitution bias.

The inflation rate is defined as the

percentage change in the price level from the previous period.

Table 23-3 Prices and Quantities Year Price of Sandwiches Quantity of Sandwiches Price of Magazines Quantity of Magazines 2006 $4.00 100 $2.00 180 2007 $5.00 120 $2.50 200 2008 $6.00 150 $3.50 200 Refer to Table 23-3. Using 2006 as the base year, for 2007,

real GDP is $880 and the GDP deflator is 125.

In calculating the consumer price index, a fixed basket of goods is used. The quantities of the goods in the fixed basket are determined by

surveying consumers.

If the prices of Australian-made shoes imported into the United States increase, then, as a result,

the consumer price index will increase, but the GDP deflator will not increase.

What basket of goods is used to construct the CPI?

the goods and services that are typically bought by consumers as determined by government surveys

The term inflation is used to describe a situation in which

the overall level of prices in the economy is increasing.

The consumer price index is used to

turn dollar figures into meaningful measures of purchasing power.

Because the CPI is based on a fixed basket of goods, the introduction of new goods and services in the economy causes the CPI to overestimate the cost of living. This is so because

when a new good is introduced, it gives consumers greater choice, thus reducing the amount they must spend to maintain their standard of living.

Table 23-3 Prices and Quantities Year Price of Sandwiches Quantity of Sandwiches Price of Magazines Quantity of Magazines 2006 $4.00 100 $2.00 180 2007 $5.00 120 $2.50 200 2008 $6.00 150 $3.50 200 Refer to Table 23-3. Nominal GDP for 2007 is

$1,100.