7.4 Chapter Figures
1) The trends displayed in the table can best be explained by
A) the nominal wage rate has increased at a rate about equal to the inlation rate.
B) the real wage rate has increased at a rate about equal to the inlation rate.
C) service industries have increased as a proportion of the economy and they tend to have
higher nominal wage rates.
D) the inlation rate has been rising over the time period.
E) None of the above can explain the trends in the igure.
Skill: Level 3: Using models
Section: Checkpoint 7.3
Status: Old
AACSB: Relective thinking
81
7.5 Integrative Questions
1) In the 1970s, a period of a high rate of inlation, a news magazine article listed people
who were losing from inlation because their real purchasing power was falling. Those who
lost the most were university professors. Which of the following explains this?
A) The marginal beneit of their work was falling.
B) Their wage rates did not increase as much as the CPI.
C) Their wage rates increased more rapidly than the CPI.
D) The professors sufered from the CPI bias.
E) The professors’ market basket was diferent than the market basket used to calculate
the CPI.
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Relective thinking
2) The GDP price index
A) can be interpreted as 100 multiplied by real GDP divided by nominal GDP.
B) is the diference between nominal GDP and real GDP.
C) measures the average price level.
D) can be interpreted as real GDP minus nominal GDP and the resulting diference then
multiplied by 100.
E) is equal to between real GDP minus nominal GDP.
Skill: Level 2: Using deinitions
Section: Integrative
Status: Old
AACSB: Relective thinking
3) The GDP price index equals
i. nominal GDP divided by real GDP multiplied by 100.
ii. a measure of the price level.
iii. an average of current prices expressed as a percentage of base-year prices.
A) i only
B) ii and iii
C) iii only
D) i and ii
E) i, ii, and iii
Skill: Level 2: Using deinitions
Section: Integrative
Status: Old
AACSB: Relective thinking
82
7.6 Essay: The Consumer Price Index
1) What are the three stages of constructing the CPI?
Skill: Level 1: Deinition
Section: Checkpoint 7.1
Status: Old
AACSB: Relective thinking
2) “The market basket used to calculate the CPI is revised monthly to more accurately
depict consumers’ choices. The price data for the CPI are collected every month.” Are the
previous sentences true or false?
Skill: Level 1: Deinition
Section: Checkpoint 7.1
Status: Old
AACSB: Relective thinking
3) If you have the cost of the CPI market basket at current prices and the cost of the CPI
market basket at base period prices, how do you calculate the CPI?
Skill: Level 1: Deinition
Section: Checkpoint 7.1
Status: Old
AACSB: Relective thinking
83
4) What is inlation and how is it measured using the Consumer Price Index?
Skill: Level 2: Using deinitions
Section: Checkpoint 7.1
Status: Old
AACSB: Analytical thinking
5) Assume that after you graduate, you move to a simple economy in which only three
goods are produced and consumed: ish, fruit, and meat. Suppose that on January 1, ish
sold for $2.50 per pound, meat was $3.00 per pound, and fruit was $1.50 per pound. At the
end of the year, you discover that the catch was low and that ish prices had increased to
$5.00 per pound, but fruit prices stayed at $1.50 per pound, and meat prices had actually
fallen to $2.00. Can you say what happened to the overall CPI, in terms of whether it
increased, decreased, or stayed the same? Do you have enough information to calculate the
inlation rate? Note, this problem requires no calculation; just state and explain your
answers.
Skill: Level 2: Using deinitions
Section: Checkpoint 7.1
Status: Old
AACSB: Analytical thinking
6) If the base year CPI market basket costs $250 and next year the CPI market basket costs
$275, what is next year’s CPI?
Skill: Level 3: Using models
Section: Checkpoint 7.1
Status: Old
AACSB: Analytical thinking
84
7) The table above gives the purchases of an average consumer in a small economy. (These
consumers purchase only loaves of bread and jugs of soda.) Suppose 2010 is the reference
base period.
a. What quantities are in the CPI market basket?
b. What is the cost of the CPI market basket using 2010 prices?
c. What is the cost of the CPI market basket using 2011 prices?
d. What is the CPI in 2011?
Skill: Level 3: Using models
Section: Checkpoint 7.1
Status: Old
AACSB: Analytical thinking
8) The table above gives the purchases of a typical consumer in a country comprised of one
large city. These consumers purchase only restaurant meals and parking. The year 2010 is
the reference base period.
a. Find the total cost of the CPI market basket for 2010 and 2011.
b. What is the CPI in 2010 and in 2011?
c. What is the inlation rate between 2010 and 2011?
Skill: Level 3: Using models
Section: Checkpoint 7.1
Status: Old
AACSB: Analytical thinking
85
9) The table above gives the CPI market basket for 2010 and 2011. Suppose that 2010 is
the reference base period.
a. What is the cost of the CPI market basket in 2010?
b. What is the cost of the CPI market basket in 2011?
c. What is the CPI for 2010?
d. What is the CPI for 2011?
Skill: Level 3: Using models
Section: Checkpoint 7.1
Status: Old
AACSB: Analytical thinking
10) If the CPI this year is 175.2 and next year the CPI is 176.1, what was the inlation rate
over the year?
Skill: Level 3: Using models
Section: Checkpoint 7.1
Status: Old
AACSB: Analytical thinking
11) Last year the CPI was 177.1 and this year the CPI was 180.9. What is the inlation rate
between these two years?
Skill: Level 3: Using models
Section: Checkpoint 7.1
Status: Old
AACSB: Analytical thinking
86
12) The table above gives the U.S. CPI for six years. Calculate the inlation rates between
1997 to 1998, 1998 to 1999, 1999 to 2000, 2000 to 2001, and 2001 to 2002.
Skill: Level 3: Using models
Section: Checkpoint 7.1
Status: Old
AACSB: Analytical thinking
7.7 Essay: The CPI and Other Price Level Measures
1) Is the CPI a biased measure of the inlation rate? Explain your answer.
Skill: Level 3: Using models
Section: Checkpoint 7.2
Status: Old
AACSB: Written and oral communication
87