MacroEcon Exam 2

Question 1

Explain what CPI is

Answer 1

Consumer price index, avg of the prices of goods and services purchased by a typical family of 4

Question 2

Explain how to calculate inflation between 2 years using CPI

Answer 2

Calculate cost of market basket using base year prices, then use that same basket for year 1 prices, then the same basket for year 2 prices

Question 3

Identify the 4 biases overstated by the CPI

Answer 3

Substitution, increase in quality, new product, and outlet

Question 4

Discuss what substitution bias is regarding the CPI

Answer 4

Some goods get more expensive - consumers sub them with cheaper options - CPI measured on a fixed market basket so it’s not reflected

Question 5

Discuss increase in quality bias regarding the CPI

Answer 5

Some increases reflect an increase in quality and not just pure inflatiin

Question 6

Discuss new product bias in regards to CPI

Answer 6

Some new goods get considerably cheaper immediately after they’ve been introduced to consumers, CPI doesn’t reflect this

Question 7

Discuss outlet bias regarding CPI

Answer 7

Internet shopping becomes more popular - CPI doesn’t reflect this bc the BLS collects receipts from actual stores, not internet retailers

Question 8

Interpret Nominal interest rate

Answer 8

The interest banks charge, but what’s rlly important is the real interest rate

Question 9

Interpret real interest rate

Answer 9

Nominal interest rate minus inflation rate

Question 10

Lenders like ___ interest rates while borrowers like ___ rates, explain

Answer 10

Higher, lower, all about the money

Question 11

Describe Long-run economic growth

Answer 11

an upward trend of real GDP over time.

Question 12

Explain what a higher GDP per capita means

Answer 12

• more goods and services people can afford to buy, and the higher their utility is.
• means better healthcare and better
  health.
• results in a decreasing hours of work and increasing leisure time.
  3

Question 13

Explain Recall

Answer 13

The growth rate of real GDP per capita between two consecutive years equals the percentage change in GDP per capita between these two years

Question 14

Describe Labor Productivity

Answer 14

the quantity of goods and services that can be produced by one worker or by one hour of work

Question 15

Identify the 2 key factors that determine Labor Productivity

Answer 15

1) The quantity of capital per hour worked.
(2) The level of technology

Question 16

Describe Capital

Answer 16

manufactured goods that are used to produce other goods and services.

Question 17

Describe investment

Answer 17

The acquisition of capital by firms

Question 18

Explain Technological Change

Answer 18

An increase in the quantity of output firms can produce using a given quantity of inputs; is more important for economic growth than capital per hours worked.