Week two learning

Question 1

What does inflation refer to?

Answer 1

Inflation refers to a situation in which the economy’s overall price level is rising

Question 2

How is the inflation rate calculated?

Answer 2

The inflation rate is the percentage change in the price level from the previous period.

Question 3

What is the Consumer Price Index (CPI)?

Answer 3

CPI is a measure of the overall cost of the goods and services bought by a typical consumer, reported monthly by the Australian Bureau of Statistics.

Question 4

What does the CPI monitor?

Answer 4

The CPI monitors changes in the cost of living over time. When the CPI rises, families must spend more to maintain the same standard of living.

Question 5

What are the steps to calculate the CPI?

Answer 5

1) Fix the basket of goods and services. 2) Find the prices of these goods and services. 3) Calculate the cost of the basket at different times.

Question 6

What is substitution bias in CPI measurement?

Answer 6

Substitution bias occurs because the basket does not change to reflect consumers’ reactions to changes in relative prices, overstating the increase in the cost of living.

Question 7

How does the introduction of new goods affect the CPI?

Answer 7

The CPI does not account for new goods that increase variety and make each dollar more valuable, leading to an overstatement of the cost of living.

Question 8

What is the problem of unmeasured quality changes in CPI?

Answer 8

If the quality of a good improves, the value of money rises even if the price remains the same, which the CPI does not fully capture.

Question 9

How does the GDP deflator differ from the CPI?

Answer 9

The GDP deflator reflects the prices of all domestically produced goods and services, while the CPI reflects prices of goods and services bought by consumers.

Question 10

How does the CPI measure price changes compared to the GDP deflator?

Answer 10

The CPI compares the price of a fixed basket of goods to the price in the base year, while the GDP deflator compares the price of currently produced goods to the price in the base year.

Question 11

What is the effect on the CPI and GDP deflator when Starbucks raises the price of muffins?

Answer 11

It affects both the CPI and GDP deflator.

Question 12

What is the effect on the CPI and GDP deflator when United Machinists Ltd. raises the price of industrial 3D printers?

Answer 12

It affects the GDP deflator but not the CPI.

Question 13

What is the effect on the CPI and GDP deflator when Armani raises the price of Italian jeans sold in the U.S.?

Answer 13

It affects the CPI but not the GDP deflator (since it’s an import).

Question 14

What does it mean for a dollar figure to be indexed for inflation?

Answer 14

It means the dollar amount has been adjusted for inflation to compare figures from different times.

Question 15

How do you calculate the real value of an amount from the past in current dollars?

Answer 15

Multiply the past amount by the ratio of the current CPI to the past CPI.

Question 16

If Amir deposits $1,000 with a nominal interest rate of 9% and inflation is 3.5%, what is the real interest rate and the real value of his savings?

Answer 16

The real interest rate is 5.5%, and the real value of his savings is $1,055.

Question 17

What was the equivalent cost of a 1965 pack of cigarettes measured in 1995 prices, given the CPI values?

Answer 17

The equivalent cost was $2.18, not $2 as initially thought.

Question 18

What is the difference between nominal interest rates and real interest rates?

Answer 18

Nominal interest rates are not adjusted for inflation, while real interest rates are corrected for inflation.