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Exam 24: Measuring the Cost of Living

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Question 61

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Jay and Joyce meet George, the banker, to work out the details of a mortgage. They all expect that inflation will be 2 percent over the term of the loan, and they agree on a nominal interest rate of 6 percent. As it turns out, the inflation rate is 5 percent over the term of the loan. a.What was the expected real interest rate? b.What was the actual real interest rate? c.Who benefited and who lost because of the unexpected inflation?

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a.
The expected real interest rate was 4...

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Question 62

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Which of the following statements is correct about the relationship between the nominal interest rate and the real interest rate?

A) The real interest rate is the nominal interest rate times the rate of inflation.
B) The real interest rate is the nominal interest rate minus the rate of inflation.
C) The real interest rate is the nominal interest rate plus the rate of inflation.
D) The real interest rate is the nominal interest rate divided by the rate of inflation.

E) All of the above
F) A) and B)

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Question 63

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Suppose a basket of goods and services has been selected to calculate the CPI and Year 1 has been selected as the base year. In Year 1, the basket's cost was $50; in Year 2, the basket's cost was $52; and in Year 3, the basket's cost was $55. The value of the CPI in Year 3 was

The producer price index measures the cost of a basket of goods and services bought by firms rather than consumers.

When the consumer price index rises, the typical family

The real interest rate is the interest rate corrected for inflation.

Persistent increases in the overall level of prices have been the norm.

Core CPI is a price index that only looks at the prices of food and energy and ignores the prices of all other goods and services.

Indexation refers to

During periods of deflation, the real interest rate will be lower than the nominal interest rate.​

Because the consumer price index reflects the goods and services bought by consumers better than the GDP deflator does, it is the more common gauge of inflation.

Changes in the consumer price index are useful in predicting changes in the producer price index.

Table 24-4 Lee's expenditures on food for three consecutive years, along with other values, are presented in the following table. ​ ​ -Refer to Table 24-4. Suppose Lee's Year 2 food expenditures in Year 3 dollars amount to $9,030. Then x, the consumer price index for Year 3, has a value of

There is no longer much debate among economists concerning the severity of and the solution to the problems in using the CPI to measure the cost of living.

In a simple economy, people consume only 2 goods, food and clothing. The market basket of goods used to compute the CPI consists of 50 units of food and 10 units of clothing. $\begin{array} { | l | l | l | } \hline & \text { Food } & \text { Clothing } \\\hline 2002 \text { price per unit } & \$ 4 & \$ 10 \\\hline 2003 \text { price per unit } & \$ 6 & \$ 20 \\\hline\end{array}$ a.What are the percentage increases in the price of food and in the price of clothing? b.What is the percentage increase in the CPI? c.Do these price changes affect all consumers to the same extent? Explain.

The real interest rate tells you

The value of the consumer price index increased from 140 to 147 during 2006. Nathan opened a bank account at the beginning of 2006, and at the end of 2006 his account balance was $12,840. The purchasing power of Nathan's account increased by 2 percent during the year. We can conclude that Nathan opened his account with a deposit of $11,500 at the beginning of 2006.

Explain how the prices of goods and services used in the CPI differ from the prices used in the PPI.

The table below lists the prices of chips and salsa for the months of October, November, and December. Assume that the typical consumer buys 8 bags of chips and 4 jars of salsa each month, and that October is the base period. $\begin{array} { | l | l | l | } \hline \text { Month } & \text { Price of Chips } & \text { Price of Salsa } \\\hline \text { October } & \$ 2.50 & \$ 2.50 \\\hline \text { November } & \$ 2.40 & \$ 2.55 \\\hline \text { December } & \$ 2.60 & \$ 2.75 \\\hline\end{array}$ -Calculate the inflation rate for November.

Abjihit deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Abjihit withdraws his $105. If inflation was 2 percent during the year the money was deposited, then Abjihit's purchasing power has increased by 3 percent.