ECO 181 Lecture Notes - Lecture 6: Producer Price Index, Gdp Deflator, Market Basket

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schen84

11 Dec 2019

School

University at Buffalo

Department

Economics

Course

ECO 181

Professor

All

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Document Summary

Chapter 6 inflation/ measuring the cost of living: history: after 1940, u. s. inflation has been mostly positive and modern but before 1940 there was significant deflation. Inflation (definition) measures the % change in the price level in the economy. Inflation formula: = rate from year 1 to year 2 = (pi year 2 pi year 1)/pi year 1 (% change in pi) Consumer price index (cpi: consumer price index (cpi) = measures the price of a basket pf good consumed by a. Typical household: measures the typical consumer"s cost of living, used to compute cost of living adjustments (colas) in many contract and in social. Thus if the cpi increases 2. 1% these contracts will increase payments 2. 1% in order to maintain a constant standard of living. How to compute the cpi and the inflation rate. Compute the cost of the basket of goods from the given information for both the current year and the base year.

Related Questions

The table below lists annual consumer price index and inflation rates for a country over the period 2005-2010. Assume the year 2005 is used as the base year.

Year	Consumer Price Index	Inflation Rate
2005	100
2006	115	B
2007	125	C
2008	140	D
2009	A	10%
2010	160	E

8.7%

120

25%

12%

The price index was 170 in the first year, 180 in the second year, and 195 in the third year. The inflation rate was about

5.9 percent between the first and second years, and 8.3 percent between the second and third years.

5.6 percent between the first and second years, and 7.7 percent between the second and third years.

10 percent between the first and second years, and 15 percent between the second and third years.

80 percent between the first and second years, and 95 percent between the second and third years.

0.1 points

QUESTION 17

The price index was 150 in the first year, 142.5 in the second year, and 138.2 in the third year. The economy experienced

		5.0 percent deflation between the first and second years, and 3.0 percent deflation between the second and third years.
		7.5 percent deflation between the first and second years, and 4.3 percent deflation between the second and third years.
		5.3 percent inflation between the first and second years, and 4.1 percent inflation between the second and third years.
		7.5 percent inflation between the first and second years, and 4.3 percent inflation between the second and third years

0.1 points

QUESTION 18

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

The real interest rate is the nominal interest rate minus the rate of inflation.

The real interest rate is the nominal interest rate times the rate of inflation.

The real interest rate is the nominal interest rate plus the rate of inflation.

The real interest rate is the nominal interest rate divided by the rate of inflation.

0.1 points

QUESTION 19

If the nominal interest rate is 6 percent and the rate of inflation is 2 percent, then the real interest rate is

4 percent.

-4 percent.

3 percent.

8 percent.

0.1 points

QUESTION 20

If the nominal interest rate is 7 percent and the real interest rate is -2.5 percent, then the inflation rate is

9.5 percent.

4.5 percent.

-4.5 percent.

-9.5 percent.

. From 2009 to 2010, the CPI for education increased from 279.3 to 281.8. What was the inflation rate for education between 2009 and 2010?

0.9%

9.0%

2.5%

90%

If the consumer price index changes from 125 in September to 150 in October, what is the rate of inflation?

20.0%

45.5%

16.7%

9.1%

. Suppose a basket of goods and services has been selected to calculate the CPI and 2014 has been selected as the base year. In 2013, the basketâs cost was $80; in 2014, the basketâs cost was $86; and in 2015, the basketâs cost was $90. The value of the CPI in 2015 was

104.6 and the inflation rate was 4.6%.

112.5 and the inflation rate was 4.6%.

112.5 and the inflation rate was 12.5%.

104.6 and the inflation rate was 12.5%.

Suppose a basket of goods and services has been selected to calculate the CPI. In 2002, the basketâs cost was $80; in 2008, the basketâs cost was $92; and in 2010, the basketâs cost was $108. The base year must be

The base year cannot be determined from the given information.

2002

2008

one of the years between 2008 and 2010.

Suppose a basket of goods and services has been selected to calculate the CPI and 2012 has been chosen as the base year. In 2012, the basketâs cost was $80.00; in 2013, the basketâs cost was $84; and in 2014, the basketâs cost was $87.60. The value of the CPI was

All of the above are correct.

109.5 in 2014.

105 in 2013.

100 in 2012.

Which of the following is correct?

The CPI is better than the GDP deflator at reflecting the goods and services bought by consumers.

The GDP deflator is better than the CPI at reflecting the goods and services bought by consumers.

The GDP deflator and the CPI are equally good at reflecting the goods and services bought by consumers.

The GDP deflator is more commonly used as a gauge of inflation than the CPI is.

The inflation rate is defined as the

percentage change in the price level from the previous period.

price level in an economy.

change in the price level from one period to the next.

price level minus the price level from the previous period.

Economists use the term inflation to describe a situation in which

the economy's overall price level is rising.

some prices are rising faster than others.

the economy's overall price level is high, but not necessarily rising.

the economy's overall output of goods and services is rising faster than the economy's overall price level.

Three goods are consumed in an economy during years 1 and 2. The table shows prices (P1 and P2) for each good, and it shows the market basket that is used to calculate the consumer price index. The base year is year 1.

Good	P1	P2	Basket
Milk (gallons)	$4	$4.20	4
Chicken (pounds)	$5	$5.50	10
Onions (bags)	$2	$2.32	1

Enter numbers in each blank, rounded to two decimal places as necessary. The cost of the basket in year 1 is $____ and the cost of the basket in year 2 is $_____. The value of the CPI in year 1 is _____ and the value of the CPI in year 2 is ______. The inflation rate is equal to ______%.

turquoisesardine982

Question 2

For any given expected inflation rate, short-run aggregate supply curves show the relationship between

the money supply and growth rate of output.

inflation and growth rate of output.

production factors and wages.

inflation and wages.

1 points

Question 3

Why is the SRAS curve steeper above its intersection with the Solow growth curve?

		Wages are stickier in the upward direction.
		Wages are less sticky in the upward direction.
		Lower inflation will lead to faster growth.
		Employees become less motivated to work during times of unexpected inflation.

1 points

Question 4

What factors triggered the Great Depression?

		decreased consumer spending and tight monetary policy
		decreased investment and increased inflation
		decreased employment and increased money supply
		decreased inflation and increased income taxes

1 points

Question 5

How might changes in the money supply be non-neutral in the short run?

		As the amount of money circulating in the economy changes before prices respond, consumers' purchases change accordingly, which leads producers to change production levels.
		When money supply changes in the short run, it will affect nominal, but not real, variables in the short run.
		As money growth increases at a faster rate, it will cause real GDP to grow at an equally faster rate.
		If producers expect inflation to increase, they will increase supply in order to sell before the arrival of inflation.

1 points

Question 6

For a given nominal interest rate, an increase in deflation will cause the real rate of interest to

remain relatively constant.

increase.

decrease.

become unpredictable.

Question 8

Which of the three price indexes measures the average price level of the largest total number of goods?

		the consumer price index
		the GDP deflator
		the producer price index
		Each price index accomplishes the same task.

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ECO 181 Lecture Notes - Lecture 6: Producer Price Index, Gdp Deflator, Market Basket

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		the money supply and growth rate of output.
		inflation and growth rate of output.
		production factors and wages.
		inflation and wages.