ECON PRELIM 3

Question 1

Measure of the overall level of prices
– Measure of the overall cost of goods and services
– Bought by a typical consumer
– Computed and reported every month by the Bureau of Labor Statistics
* E.g. Philippine Statistics Authority (PSA)

Answer 1

CONSUMER PRICE INDEX (CPI)

Question 2

Over time, some prices rise faster than others
– Consumers substitute toward goods that become relatively cheaper, mitigating the effects of price increases.
– The CPI misses this substitution because it uses a fixed basket of goods.
– Thus, the CPI overstates increases in the cost of living.

Answer 2

substitution bias

Question 3

CPI misses
substitution bias
introduction of new goods
unmeasured quality change

Question 4

A measure of the overall level of prices
Measures the current level of prices relative to the level of prices in the base year

Answer 4

GDP deflator

Question 5

Values output using current prices
– Not corrected for inflation

Answer 5

Nominal GDP

Question 6

Values output using the prices of a base year
– Is corrected for inflation

Answer 6

Real GDP

Question 7

Included in CPI
– Excluded from GDP deflator

Answer 7

Imported Consumer Goods

Question 8

Excluded from CPI
– Included in GDP deflator (if produced domestically)

Answer 8

Capital Goods

Question 9

CPI uses FIXED BASKET
– GDP deflator uses basket of
CURRENTLY produced goods & services

Question 10

A dollar amount is indexed for inflation if it is automatically corrected for inflation by law or in a contract.

Answer 10

indexation

Question 11

Interest rate not corrected for inflation
– Rate of growth in the DOLLAR VALUE of a deposit or debt

Answer 11

nominal interest rate

Question 12

Corrected for inflation
– Rate of growth in the PURCHASING POWER of a deposit or debt

Answer 12

Real interest rate