Chapter 17

Question 1

A number that expresses the relative change in price, quantity, or value compared to a base period.

Answer 1

Index number

Question 2

Name three characteristics of a of an index

Answer 2

1. It is a percent, but the percent is typically left off
2. They have either a base or a base period their set against
3. Most businesses report to the nearest whole number or 10th

Question 3

What are two reasons to convert data to an index

Answer 3

1. It’s a convenient way to express change in a diverse group of items
2. It makes it easier to asses the trend in a series of exceptionally large numbers

Question 4

What is the formula for constructing a simple index

Answer 4

P=(pt/p0)*100
p0 = base pt= current period

Question 5

Formula for constructing average of price relatives

Answer 5

P=SumPi/n

Question 6

Formula for a simple aggregate index

Answer 6

P=SumPt/SumP0*100

Question 7

Why isn’t an aggregate index used as ofter

Answer 7

It can be influenced by the units of measure

Question 8

What are methods for computing a weighted price index

Answer 8

Laspeyres, Paasche, Value, Fishers Ideal

Question 9

What is a weakness of simple average indexes

Answer 9

It’s not weighted

Question 10

Advantage and disadvantage of laspeyres

Answer 10

A: Requires quantity data only from base period. More meaningful comparison that is attributed to price
D: Does not reflect buying patterns and may overweight goods with price increases

Question 11

Paasche

Answer 11

A: Reflects current buying habits
D: Requires quantity data from the current year. Cant attribute change to price alone, overweights goods whos price has declined

Question 12

What is Fishers index

Answer 12

The geometric mean of Laspreyes and Paasche. Square root of L*P

Question 13

This type of index measures changes in both the price and quantities

Answer 13

Value index

Question 14

This special index describes the changes in prices from one period to another for a “market basket” of goods and services

Answer 14

Consumer price index

Question 15

A special index that reflects the prices of over 3400 commodities. It is a Laspeyres type index

Answer 15

Producer price index

Question 16

This is an indicator of 30 specific industrial stocks

Answer 16

Dow Jones Industrial Average

Question 17

This is an index of average prices for all stocks on the New York Stock Exchange

Answer 17

New York Stock Exchange Index

Question 18

What major functions does the CPI perform

Answer 18

1. Illustrates erosion of purchasing power
2. Works as a yardstick for revising wages, pensions, and other income
3. An economic indicator for the rate of inflation

Question 19

What is the formula for real income

Answer 19

RI=Money income/CPI*100