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eco 111 ch 6

Terms in this set (6)

Consider a fictional price index, the College Student Price Index (CSPI), based on a typical college student's annual purchases. Suppose the following table shows information on the market basket for the CSPI and the prices of each of the goods in 2014, 2015, and 2016.
The cost of each item in the basket and the total cost of the basket are shown for 2014.
Suppose the base year for this price index is 2014.
In the last row of the table, calculate and enter the value of the CSPI for the remaining years.
Between 2014 and 2015, the CSPI increased by
25%
. Between 2015 and 2016, the CSPI increased by
50%
.
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.
75 120
100 130
500 500
200 300
1500 1800
2375 2850
125 150

25 20

A new, safe method of memory enhancement became available for purchase.
As the price of textbooks increased, more and more students turned to the used-book market or chose not to buy textbooks at all, instead using the copies on reserve in the library.
The quality and design of calculators improved dramatically from 2014 to 2016. For example, calculators made in 2016 accept memory cards, whereas those made in 2014 do not, but this quality change is hard to measure.
Because there isn't one single measure of inflation, the government and researchers use a variety of methods to get the most balanced picture of how prices fluctuate in the economy. Two of the most commonly used price indexes are the consumer price index (CPI) and the GDP deflator.
The GDP deflator for this year is calculated by dividing the using by the using and multiplying by 100. However, the CPI reflects only the prices of all goods and services .

A decrease in the price of a Chinese-made car that is popular among U.S. consumers


An increase in the price of a Waterman Industries deep-water reel, which is a commercial fishing product used for deep-sea fishing, made in the U.S., but not bought by U.S. consumers
value of all goods and services produced in the economy this year
this year's prices
value of all goods and services produced in the economy this year
the base year's prices
bought by consumers

cpi
gdp deflator
Consider golfers who led the Professional Golfers' Association of America (PGA) in winnings at different points in time. Note that the winnings are nominal figures (unadjusted for inflation).
To convert the original earnings of Casper, Nicklaus, and Kite, use the formula for converting dollar figures from an earlier era into year 2010 U.S. dollars. Using those figures, fill in the following table, making sure to round your responses to the nearest U.S. dollar.
True or False: According to the previous table, the golfer with the highest PGA winnings in nominal dollars is the same as the golfer with the highest PGA winnings after adjusting for inflation.
nominal winnings* current year index(2009)/original year index(1965)
1325934
1561951
929535
true
The following table shows the average nominal interest rates on six-month Treasury bills between 1963 and 1967, which determined the nominal interest rate that the U.S. government paid when it issued debt in those years. The table also shows the inflation rate for the years 1963 to 1967. (All rates are rounded to the nearest tenth of a percent.)
Year
Nominal Interest Rate
Inflation Rate
(Percent)
(Percent)
1963 3.3 1.3
1964 3.7 1.3
1965 4.1 1.6
1966 5.1 2.9
1967 4.6 3.1
According to the table, in which year did buyers of six-month Treasury bills receive the highest real return on their investment?
(real interest rate
nominal-inflation)
1965
Suppose Hilary is an avid reader and buys only mystery novels. Hilary deposits $3,000 in a bank account that pays an annual nominal interest rate of 5%. Assume this interest rate is fixed—that is, it won't change over time. At the time of her deposit, a mystery novel is priced at $10.00.
Initially, the purchasing power of Hilary's $3,000 deposit is
mystery novels.

Annual Inflation Rate
0% 5% 8%
Number of Novels Hilary Can Purchase after One Year
Real Interest Rate

When the rate of inflation is greater than the interest rate on Hilary's deposit, the purchasing power of her deposit over the course of the year.
300
315 300 291
5 0 -3
falls
4.5 4.5 7.2 7.9 6.1
.1 1.3 1.0 -3.1 -3
1972
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