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Chapters 10,11,15

1.) Which agency calculates the CPI?

the Bureau of Labor Statistics

CPI equation

2.)Suppose a basket of goods and services has been selected to calculate the CPI and 2002 has been selected as the base year. In 2002, the basket's cost was $50; in 2004, the basket's cost was $52; and in 2006, the basket's cost was $54,60. The value of the CPI in 2006 was

CPI = (54.6/50) x 100 = 109.2%

Inflation Rate equation for CPI

3.)Which of the following is not a widely acknowledged problem with using the CPI as a measure of the cost of living?

unmeasured price change

** substitution bias, introduction of new goods, unmeasured quality change all cause problems with CPI

4.)The price index was 128.96 in 2006, and the inflation rate was 24 percent between 2005 and 2006. The price index in 2005 was..


CPI yr 2 = 128.96
CPI yr 1 = ?
Inflation rate yr 2 = 24

24% = [(128.96-x)/(x)] x 100 = 104

6.) GDP is defined as

the MARKET VALUE of all goods and services produced within a country in a given period of time.

Year Price of Pork Price of Corn
2008 $20 per lb. $12 per bushel
2009 $25 per lb. $18 per bushel


the basket consists of 3 pounds of pork and 4 bushels of corn

basket 3lbs 4 bushels
Year Price of Pork Price of Corn
2008 $20 per lb. $12 per bushel
2009 $25 per lb. $18 per bushel

8.) The cost of the basket in 2008 was

(3 x $20) + (4 x $12) = 108

9.) If 2008 is the base year, then the CPI for 2009 was

($147/$108) x 100 = 136

10.) If 2009 is the base year, then the CPI for 2009 was


11.) The cost of the basket in 2009 was

(3 x $25) + (4 x $18) = $147

the GDP deflator

Inflation Rate equation for GDP

Nominal GDP is measured using the ________ prices.


Real GDP is measured using _______ prices from the _____ _______.

constant; base year

real GDP/ population =

per capita
(measures the average standard of living per person)

People who are unemployed because wages are, for some reason, set above the level that brings labor supply and demand into equilibrium are best classified as

structurally unemployed
(not enough jobs to go around)

The natural rate of unemployment is made up of ________ and ________ unemployment

frictional and structural

The deviation of unemployment from its natural rate is called

cyclical unemployment
(over the natural rate, recession)

Transfer Payments are

not included in GDP because they are not payments for currently produced goods or services

For an economy as a whole, income must equal expenditure because

every dollar of spending by some buyer is a dollar of income for some seller

The market values of both owner-occupied housing services and rental housing services are included in GDP


The BLS places people in the employed category if they

1. work w/o pay in a family member's house.
2. are temporarily absent from their jobs.
3. are self-employed

People who are unemployed because of job search are best classified as

frictionally unemployed

If the nominal interest rate is 7% and the real interest rate is -2.5%, then the inflation rate is


-2.5 = 7-x
-9.5 = x

Real Rate= Nominal rate- Inflation


The CPI is a measure of the overall cost of the goods and services bought by

a typical consumer

Which of the following items is included in U.S. GDP?

goods produced by foreign citizens working in the United States

Compare dollar figures to different times

Babe Ruth's 1931 salary was $80,000. CPI of 15.2 for 1931 and 207 for 2007. Ruth's 1931 salary was equivalent to a 2007 salary of about..

[(207)/(15.2)] x 80,000 = 1,089,473

Jenna is searching for a job that suits her tastes about where to live and coworkers. Mary is looking for a job that makes best use of her skills.

they are both frictionally unemployed

For any given year, the CPI is the price of the basket of goods and services in the

given year divided by the price of the basket in the base year then multiplied by 100

the GDP deflator is the ratio of

nominal GDP to real GDP by 100

Consumption consists of spending by households on goods and services, with the exception of

purchases of new houses

What word do economists use to refer to the purchase of goods that will be used in the future to produce more goods and services


A recession has traditionally been defined as a period during which

real GDP declines for two consecutive quarters

When a union raises the wage above the equilibrium level, it

raises the quantity of labor supplied and reduces the quantity of labor demanded, resulting in

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