Quiz Two

Question 1

Price level

Answer 1

Measures average prices of goods and services

Question 2

Inflation rate

Answer 2

Percentage increase in price level from year to year

Question 3

CPI v. GDP deflator

Answer 3

GDP deflator is broad, includes every good and service . CPI can answer more specific questions about inflation

Question 4

CPI market basket

Answer 4

211 goods and services purchased by a typical family of 4. Consists of 8 broad categories

Question 5

Consumer Price Index definition

Answer 5

Ratio of the value of a market basket of goods and services for the typical household in a month as compares to that of the arbitrary base period

Question 6

CPI formula

Answer 6

(Expenditures in the current year)/(Expenditures in the base year) * 100

Question 7

Can CPI tell us how high the price level is?

Answer 7

No, only how it’s changed over time

Question 8

Inflation

Answer 8

Percent increase between CPI values

Question 9

Inflation rate formula

Answer 9

(Current CPI- Previous year CPI)/(Previous CPI) * 100

Question 10

Substitution bias

Answer 10

BLS assumes people buy the same amount of each product in the market basket. In fact, consumers want the items that increase the least in price over time. Measure doesn’t account for these changes from year to year

Question 11

Increase in quality bias

Answer 11

Recorded price increases overstate pure inflation since products improve in quality over time

Question 12

New product bias

Answer 12

New products aren’t included in market basket updates, and prices of new products decrease in the years immediately after release

Question 13

Outlet bias

Answer 13

Market basket stats only account for prices at traditional retailers and don’t reflect prices some consumers are paying online or at outlets

Question 14

Problems with CPI as a measure

Answer 14

Substitution bias, increase in quality bias, new product bias, outlet bias. Can’t say how high price level is, and overstates true inflation

Question 15

CPI adjusts for the ___ of inflation and lets us ____ dollar amounts from different years

Answer 15

Effects, compare

Ex: we can calculate what $25,000 1993 dollars equals in 2018

Question 16

Nominal variables

Answer 16

Economic variables calculated in current year prices

Question 17

Interest rate

Answer 17

Cost of borrowing funds, expressed as a percentage of the amount borrowed

Ex: if you loan someone $1000 at a 4% interest rate, they pay back that 4% with the amount of money borrowed

Question 18

Nominal interest rate

Answer 18

Stated interest rate on a loan

Question 19

Real interest rate calculation

Answer 19

Nominal interest rate - inflation rate

Question 20

How to measure nominal interest rate for the whole economy

Answer 20

Use interest rate on 3 month treasury bills, since they’re an important security in the market

Question 21

Real v nominal interest rate

Answer 21

Hard to know if nominal is high or low, but it’s always lower than real (save negative interest rates)

Real interest rate is a better measure of true cost of borrowing and return of lending

Question 22

Deflation

Answer 22

Decline in price level

Question 23

Core CPI

Answer 23

Measures CPI adjusted for food and energy prices

Question 24

Core rate of inflation

Answer 24

Measures inflation without food and energy prices, gives a better sense of inflation

Question 25

Is it possible for the whole economy to see deflation

Answer 25

Yes, especially in recessions

Question 26

True or false: if prices double overnight, wages and salaries would also double, leaving purchasing power the same

Answer 26

True

Question 27

Issues with inflation

Answer 27

Incomes don’t always rise with inflation Those with fixed incomes are particularly hurt by inflation

Question 28

Menu costs

Answer 28

The costs to firms of changing prices. Can become quite high at high rates of inflation

Question 29

Uses of CPI

Answer 29

Measures price level for consumers Tells how price level changes over time Measures the cost of market basket from year to year

Question 30

Disinflation

Answer 30

Less inflation

Question 31

Connection between inflation and CPI

Answer 31

Inflation is the percent change between CPI from year to year

Question 32

Connection between inflation and interest rates

Answer 32

High interest rates = less inflation, low supply Low interest rates = high inflation, high demand

Question 33

Bond

Answer 33

Financial security that represents a promise to repay a fixed amount of funds

Question 34

Financial security

Answer 34

States any terms under which money changes hands

Question 35

Stock

Answer 35

Financial security that represents partial ownership of a firm

Question 36

Beating the market

Answer 36

Earning a return higher than the increase in a stock market average

Question 37

Why is beating the market hard.

Answer 37

Because stock prices are extremely hard to predict as they’re based on expected future profitability of a firm

Question 38

Fiscal policy

Answer 38

A change in federal expenditures

Question 39

How is fiscal policy being used post pandemic

Answer 39

Government uses increase in federal expenditures to stimulate economic growth. Trillions were spent to fight the economic effects of covid

Question 40

Nominal price

Answer 40

The amount it takes to buy an item

Question 41

Real price definition

Answer 41

Removes inflation from a nominal price or interest rate

Question 42

Real price subtraction method

Answer 42

Percent change in nominal price/wage - inflation rate

Question 43

CPI value

Answer 43

295.3

Question 44

Real price division method

Answer 44

Price * (current CPI/base CPI)

Question 45

Federal deficit

Answer 45

Occurs when the govts spending exceeds its revenues

Question 46

Federal debt

Answer 46

Money owed to someone else, accumulation of years of deficit