ECON 201- Chapter 16 Measuring the Cost of Living – Flashcards
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The consumer price index measures approximately the same economic phenomenon as
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the GDP deflator.
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The largest component in the basket of goods and services used to compute the CPI is
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housing.
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If a Pennsylvania gun manufacturer raises the price of rifles it sells to the U.S. Army, its price hikes will increase
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the GDP deflator but not the CPI.
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Because consumers can sometimes substitute cheaper goods for those that have risen in price,
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the CPI overstates inflation.
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If the consumer price index is 200 in year 1980 and 300 today, then $600 in 1980 has the same purchasing power as ________ today.
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$900
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Amount in today's dollar=
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Amount in year T dollars x (price level today / price level in year T)
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Real interest rate=
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Nominal Interest Rate - Inflation Rate
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real interest rate
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the interest rate corrected for the effects of inflation
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nominal interest rate
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the interest rate as usually reported without a correction for the effects of inflation
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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.
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5% , 3% An increase from $2,000 to $2,100 represents a nominal interest rate of .05 , or 5%. An increase in CPI from 200 to 204 reflects 2% inflation. The real interest rate: 5% - 2%= 3%
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Consumer Price Index
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is a measure of the overall cost of the goods and services bought by a typical consumer.
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Consumer Price Index=
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(Price of baskets of goods and services in current year / price of basket in base year) x 100
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inflation rate
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the percentage change in the price index from the preceding period
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Inflation rate in year 2=
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((CPI in year 2 -CPI in year 1) /CPI in year 1) x 100
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Percentage of Change in X
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((New value of X- Old value of X) / (Old Value of X)) x 100
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If you were to learn that a bottle of Gatorade increased in size from 2014 to 2015, that information would_____ your estimation of the inflation rate.
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lower because the value of a bottle of Gatorade is now greater than before
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If you were to learn that Gatorade introduced new flavors in 2015, that information would_____ your estimation of the inflation rate.
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lower More flavors enhance consumers' well-being. Thus, this would be considered a change in quality.
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GDP deflator:
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measures the change in nominal GDP from the base year that cannot be attributable to a change in real GDP
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The inflation rate is not the same using the two methods because the ____holds the basket of goods and services constant, while the______ allows it to change.
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CPI , GDP deflator
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substitution bias
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When prices change from one year to the next, they do not change proportionately. This causes consumers to substitute toward goods that have become relatively less expensive
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introduction of new goods
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When a new good is introduced, consumers have more variety from which to choose, and this, in turn, reduces the cost of maintaining the same level of economic well-being
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unmeasured quality change
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If the quality of a good deteriorates from one year to the next while its price remains the same, the value of a dollar falls, because you are getting a lesser good for the same amount of money. Similarly, if the quality rises from one year to the next, the value of a dollar rises.
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Suppose that a borrower and a lender agree on the nominal interest rate to be paid on a loan. Then inflation turns out to be higher than they both expected. The real interest rate on this loan is_______ than expected. The lender________ from this unexpectedly high inflation, and the borrower________ under these circumstances.
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lower loses, gains
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Inflation during the 1970s was much higher than most people had expected when the decade began. Homeowners who obtained fixed-rate mortgages during the 1960s________ the unexpected inflation, and the banks that made the mortgage loans were______.
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benefited from, harmed
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indexed
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the automatic correction by law or contract of a dollar amount for the effects of inflation
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Which of the following, if true, would illustrate why price indexes such as the CSPI might overstate inflation in the cost of going to college? Check all that apply. As the price of calculators rose, fewer students decided to buy them, opting instead to use the free calculators in their cell phones or on their computers. A new mobile device for personal computing became available for purchase. Professors required each student to buy 10 textbooks, regardless of the price. Energy drinks became increasingly popular on college campuses between 2010 and 2012 due to significant improvements in flavor.
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As the price of calculators rose, fewer students decided to buy them, opting instead to use the free calculators in their cell phones or on their computers. A new mobile device for personal computing became available for purchase. Energy drinks became increasingly popular on college campuses between 2010 and 2012 due to significant improvements in flavor.
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Will affect the GDP deflator or the CPI for the United States: An increase in the price of a Treewood Equipment feller buncher, which is a commercial forestry machine that cuts and stacks trees
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GDP deflator
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Will affect the GDP deflator or the CPI for the United States: A decrease in the price of a Japanese-made television that is popular among U.S. consumers
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CPI
