Chapter 23

Question 1

Consumer Price Index (CPI)

Answer 1

a measure of the average of the prices paid by urban consumers for a fixed market basket of consumption goods and services.

Question 2

When calculating the CPI, we have an established

Answer 2

reference base period of average prices and an established market basket.

Question 3

The reference base period of CPI

Answer 3

some year in which we have set the CPI to 100 to serve as a benchmark and allows us to understand changes to CPI.

Question 4

3 Steps to calculate CPI

Answer 4

Find the cost of the CPI market basket at base period prices; Find the cost of the CPI market basket at current period prices; Calculate the CPI for the base period and the current period.

Question 5

Formula for calculating CPI

Answer 5

(Cost of CPI basket at current period prices)/(Cost of CPI basket at base period prices)X100

Question 6

Inflation Rate

Answer 6

the percentage change in the price level from one year to the next

Question 7

Inflation rate formula

Answer 7

(CPI in current year - CPI in previous year)/(CPI in previous year)X100

Question 8

Deflation

Answer 8

a situation in which the price level is falling and the inflation rate is negative.

Question 9

Potential sources of CPI bias include

Answer 9

New Good Bias; Quality Change Bias; Commodity Substitution Bias; Outlet Substitution Bias

Question 10

New Good Bias

Answer 10

iPod vs. Discman

Question 11

Quality Change Bias

Answer 11

2017 Ford Focus vs. 1991 Ford Focus

Question 12

Commodity Substitution Bias

Answer 12

Substitute from higher priced carrots to lower priced broccoli

Question 13

Outlet Substitution Bias

Answer 13

Buying goods online for less

Question 14

Alternative Measures of the Price Level and Inflation Rate

Answer 14

GDP price index (the GDP Deflator)
Personal consumption expenditures (PCE) price index
PCE price index excluding food and energy

Question 15

The GDP Price Index

Answer 15

an average of the current prices of all the goods and services included in GDP expressed as a percentage of base-year prices.

Question 16

The GDP price index uses

Answer 16

the prices of all the goods and services in GDP

Question 17

All the goods and services in GDP

Answer 17

consumption goods and services, capital goods, government goods and services, and export goods and services

Question 18

The CPI uses

Answer 18

prices of consumption goods and services only.

Question 19

The GDP price index weights

Answer 19

each item using information about current quantities.

Question 20

The CPI weights

Answer 20

each item using information from a past Consumer Expenditure Survey.

Question 21

The Personal Consumption Expenditures (PCE) Price Index

Answer 21

is an average of the current prices of the goods and services included in the consumption expenditure component of GDP expressed as a percentage of base-year prices.

Question 22

The (PCE) Price Index Excluding Food and Energy

Answer 22

is known as the Core Inflation Rate which reflects the annual percentage change in the PCF price index excluding the prices of food and energy.

Question 23

When we talk about Nominal and Real Values, we are effectively indicating ____

Answer 23

if we have adjusted for inflation or not.

Question 24

Nominal values

Answer 24

have not adjusted for inflation and will strictly look at the change between periods.

Question 25

Real values

Answer 25

adjust for inflation and will factor that in when comparing different periods.

Question 26

The nominal wage rate

Answer 26

is the average hourly wage rate measured in current dollars.

Question 27

The real wage rate

Answer 27

is the average hourly wage rate measured in the dollars of a given reference base year.

Question 28

Real wage rate formula

Answer 28

(Nominal wage rate in current year)/Current year CPI)X100

Question 29

Nominal Interest Rate

Answer 29

is the dollar amount of interest expressed as a percentage of the amount loaned.

Question 30

Real interest rate

Answer 30

is the goods and services forgone in interest expressed as a percentage of the amount loaned and calculated as the nominal interest rate minus the inflation rate.

Question 31

Real interest rate

Answer 31

Nominal Interest Rate - Inflation Rate