Chapter 1

Question 1

Positive Analysis

Answer 1

Analysis describing the relationship between cause and effect. Positive questions deal with explanation and prediction.

Examples

This car’s listed price is $35,000

The United States spends more money on its military than any other country.

Question 2

Normative Analysis

Answer 2

Analysis examining questions of what ought to be. A normative analysis is often supplemented by Value Judgement

Examples:

Taxes in a particular country are too high and should be lowered

Only suckers pay the sticker price

Question 3

Nominal Price

Answer 3

Absolute price of a good, unadjusted for inflation

Question 4

Real Price

Answer 4

Nominal Price* (cpi Base year/ cpi current year)

Question 5

Arbitrage

Answer 5

simultaneous purchase and sale of an asset to profit from an imbalance in price. Trade that profits by exploiting price differences of identical or similar financial instruments on different market or in different forms.

Question 6

Consumer Price Index and Producer Price Index

𝑪𝑷𝑰 𝒐𝒇 𝒚𝒆𝒂𝒓 𝒊 𝒃𝒂𝒔𝒆𝒅 𝒐𝒏 𝒚𝒆𝒂𝒓 𝒚

Answer 6

CPI: Measure of the aggregate price level. Published by Statistics Canada for Canada, represents the price level to purchase a basket of goods a typical Canadian would normally buy at a given year. Percentage changes in the CPI measure the rate of inflation in the economy.

PPI: Measure of the aggregate price level for intermediate products and wholesale goods.

1. 𝑹𝒆𝒂𝒍 𝑷𝒓𝒊𝒄𝒆 = 𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝑷𝒓𝒊𝒄𝒆 × (𝑪𝑷𝑰𝒃𝒂𝒔𝒆 𝒚𝒆𝒂𝒓/𝑪𝑷𝑰𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒚𝒆𝒂𝒓)
2. 𝑪𝑷𝑰 𝒐𝒇 𝒚𝒆𝒂𝒓 𝒊 𝒃𝒂𝒔𝒆𝒅 𝒐𝒏 𝒚𝒆𝒂𝒓 𝒚 = (𝑪𝑷𝑰 𝒐𝒇 𝒚𝒆𝒂𝒓 𝒊 𝒃𝒂𝒔𝒆𝒅 𝒐𝒏 𝒚𝒆𝒂𝒓 𝒙/𝑪𝑷𝑰 𝒐𝒇 𝒚𝒆𝒂𝒓 𝒚 𝒃𝒂𝒔𝒆𝒅 𝒐𝒏 𝒚𝒆𝒂𝒓 𝒙) × 100