Exam 2- BBL 1/A
Real GDP is
the value of total production linked back to the pries of a single year
Fishers mean
type of price index theory averages the base year and current year's quantity
The CPI is a measure o the average of the prices paid by_ for a fixed basket of consumer goods and services
urban consumers
If the CPI basket cost of goods cost $200 in the reference base period and $450 in a later year the CPI in the later year equals
225
Which type of price index theory uses base year's quantities
Laspeyres
Which type of price index theory uses current year quantities?
Paashe
Suppose the CPI last year is 121 and this year is 137. The correct method to calculate the inflation rate is
[(137-121)/121] X 100
An example of "investment" in computing real GDP using the expenditure approach is the purchase of
a new set of tools by an auto mechanic, for use in repairing cars
Deflation represents
a reduction in the aggregate price level
The CPI
compares the cost fo the typical basket of goods consumed in period 1 to the cost ofa basket of goods typically consumed in period 2
As currently calculated, the CPI tends to overstate true inflation rate because
it fails to correctly measure quality changes for some products
Because of the biases in calculating the CPI actual inflation is
less than the measured inflation rate by about 1 percent per year.
The biases in the CPI include the
new goods, quality change, and substitution biases
Price index can overstate inflation because they
omit some quality improvements
Suppose the CPI index is 143.6 what does this mean
prices rose 43.6 percent over the reference base period on average
The current used method for calculating the CPI
probably overstates inflation by about 1 percentage point
Substitution bias in the CPI refers to the fact that the CPI
takes no account of the substation of goods by consumers when relative prices change
Looking at inflation rates in the United States since 1970's we see that
the 1970's experienced the highest inflation rates
