# Shared Flashcard Set

## Details

Principles of Macroeconomics-Chp. 8.2
Chapter Eight (Part Two)--Quiz
22
Economics
12/05/2011

Term
 True or False?As of December 2010, housing, transportation, and medical care were the largest three categories ofexpenditures in the CPI's market basket.
Definition
 FALSE.As of December 2010, housing, transportation, and food and beverages were the largestthree categories of expenditures in the CPI's market basket.
Term
 True or False?If the CPI is 230, then the average price of the goods and services purchased by the typical urban familyof four is 230 percent higher than the average price in the base year.
Definition
 FALSE.If the CPI is 230, then the average price of the goods and services purchased by the typicalurban family of four is 130 percent higher than the average price in the base year.
Term
 The market basket for Wrexington's CPI consists of 3 collars and 2 leashes. The base year is 2007. In2006, the price of a collar was \$1 and the price of a leash was \$5. In 2007, the price of a collar was \$2 andthe price of a leash was \$5. In 2008, the price of a collar was \$2 and the price of a leash was \$7. In 2009, theprice of a collar was \$2 and the price of a leash was \$9. In 2010, the price of a collar was \$4 and the price of aleash was \$10.What was the cost of Wrexington's CPI market basket in 2006?
Definition
 13cost of basket in 2006 = (\$1)(3) + (\$5)(2) = \$13
Term
 The market basket for Wrexington's CPI consists of 3 collars and 2 leashes. The base year is 2007. In2006, the price of a collar was \$1 and the price of a leash was \$5. In 2007, the price of a collar was \$2 andthe price of a leash was \$5. In 2008, the price of a collar was \$2 and the price of a leash was \$7. In 2009, theprice of a collar was \$2 and the price of a leash was \$9. In 2010, the price of a collar was \$4 and the price of aleash was \$10.What was Wrexington's CPI in 2008?
Definition
 125cost of basket in 2007 = (\$2)(3) + (\$5)(2) = \$16cost of basket in 2008 = (\$2)(3) + (\$7)(2) = \$20CPI in 2008 = (\$20/\$16)(100) = 125
Term
 The market basket for Wrexington's CPI consists of 3 collars and 2 leashes. The base year is 2007. In2006, the price of a collar was \$1 and the price of a leash was \$5. In 2007, the price of a collar was \$2 andthe price of a leash was \$5. In 2008, the price of a collar was \$2 and the price of a leash was \$7. In 2009, theprice of a collar was \$2 and the price of a leash was \$9. In 2010, the price of a collar was \$4 and the price of aleash was \$10.What was Wrexington's inflation rate from 2009 to 2010?
Definition
 33cost of basket in 2007 = (\$2)(3) + (\$5)(2) = \$16cost of basket in 2009 = (\$2)(3) + (\$9)(2) = \$24cost of basket in 2010 = (\$4)(3) + (\$10)(2) = \$32CPI in 2009 = (\$24/\$16)(100) = 150CPI in 2010 = (\$32/\$16)(100) = 200inflation rate from 2009 to 2010 = [(200-150)/150][100%] = (50/150)(100%) = 33%
Term
 True or False?When an economy is experiencing inflation, the prices of all goods and services in the economy areincreasing.
Definition
 FALSE.At any point, some prices are increasing and some are decreasing. Inflation means that theprice increases outweigh the price decreases.
Term
 True or False?Over the past 60 years, the price level has risen an average of about 2% per year in the U.S.
Definition
 FALSE.Over the past 60 years, the price level has risen an average of about 4% per year in the U.S.
Term
 True or False?The U.S. economy has not experienced deflation since the 1950s.
Definition
 FALSE.The U.S. economy experienced deflation in January 2009.
Term
 True or False?Substitution bias, increase in quality bias, new product bias, and outlet bias all cause changes in the CPI tounderstate the true inflation rate.
Definition
 FALSE.Substitution bias, increase in quality bias, new product bias, and outlet bias all causechanges in the CPI to overstate the true inflation rate.
Term
 True or False?Holding all else constant, when the price of domestically produced industrial robots increases, both theGDP deflator and the CPI increase.
Definition
 FALSE.Industrial robots are not purchased by the typical urban family of four, so their price isnot included in the CPI. Therefore, the GDP deflator increases, but the CPI stays the same.
Term
 True or False?The CPI tends to increase after the PPI increases.
Definition
 TRUE.
Term
 In Iowa, the price of a paperback novel was \$1 in 1950 and \$7 in 2010. Iowa's CPI was 30 in 1950 and 150in 2010. What is the 1950 price of a paperback novel in 2010 dollars?
Definition
 51950 price of paperback novel in 2010 dollars = (\$1)(150/30) = \$5
Term
 Esme is offered a job in Chicago at a salary of \$80,000 per year. She is also offered a job in Tucson at asalary of \$70,000 per year. The CPI for Chicago is 230, and the CPI for Tucson is 200. If Esme only caresabout maximizing her purchasing power, which job should she take?1. Chicago2. Tucson
Definition
 2. TucsonChicago salary in Chicago dollars = \$80,000Tucson salary in Chicago dollars = (\$70,000)(230/200) = \$80,500ORChicago salary in Tucson dollars = (\$80,000)(200/230) = \$69,565Tucson salary in Tucson dollars = \$70,000
Term
 True or False?If the nominal interest rate is 7% per year and the inflation rate is 2% per year, then the number ofdollars in a savings account will increase by 5% per year.
Definition
 FALSE.If the nominal interest rate is 7% per year and the inflation rate is 2% per year, then thenumber of dollars in a savings account will increase by 7% per year (nominal interest rate) and thepurchasing power of the savings account will increase by 5% per year (real interest rate).
Term
 True or False?If the nominal interest rate is 1% per year and the inflation rate is -2% per year, then the real interest rateis -1% per year.
Definition
 FALSE.If the nominal interest rate is 1% per year and the inflation rate is -2% per year, then thereal interest rate is 3% per year [1% - (-2%) = 1% + 2% = 3%].
Term
 True or False?The real interest rate is more important to borrowers and lenders than the nominal interest rate is.
Definition
 TRUE.
Term
 True or False?For the average consumer, purchasing power is not affected by inflation in the long run.
Definition
 TRUE.
Term
 People on fixed incomes prefer inflation to be lower than expected.
Definition
 TRUE.When the inflation rate is lower than expected, the purchasing power of a fixed income ishigher than expected.
Term
 If the real interest rate is 3%, the inflation rate is 2%, and nominal interest is taxed at 20%, then what isthe after-tax real interest rate?
Definition
 2nominal interest rate = real interest rate + inflation rate = 3% + 2% = 5%20% tax on nominal interest = (nominal interest rate)(0.2) = (5%)(0.2) = 1%after-tax real interest rate = real interest rate - tax = 3% - 1% = 2%
Term
 True or False?People with savings accounts prefer inflation to be lower than expected.
Definition
 TRUE.When the inflation rate is lower than expected, the real interest rate is higher thanexpected, so the purchasing power of a savings account increases faster than expected.
Term
 True or False?A government that sold bonds prefers inflation to be lower than expected.
Definition
 FALSE.When the inflation rate is lower than expected, the real interest rate is higher thanexpected, so the government is paying interest on the bonds with dollars that have higher purchasingpower than expected (i.e., the government is giving up more purchasing power than it expected).
Term
 True or False?Banks that made long-term fixed rate loans prefer inflation to be lower than expected.
Definition
 TRUE.When the inflation rate is lower than expected, the real interest rate is higher thanexpected, so the dollars the bank receives from interest payments on the loans have more purchasingpower than expected (i.e., the bank is earning more purchasing power than it expected).
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