Econ 101

SP04/Homework # 2

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  1. The CPI was 140 in one year and 145.2 the following year. Approximately how much did prices rise between the two years?

a.3.7 percent

b.3.15 percent

c.0.03 percent

d.1.04 percent

e.none of the above

  1. If the CPI is 100 in the base year and 127 in the current year, how much did prices rise between the two years?

a.27 percent

b.127 percent

c.1.27 percent

d.0.27 percent

  1. Suppose the market basket consists of 10X, 20Y, and 30Z. Current-year prices are $1.00 for each unit of X, $0.96 for each unit of Y, and $1.13 for each unit of Z. Base-year prices are $1.00 for each unit of X, Y, and Z. What is the approximate CPI in the current year?

a.1.05

b.203

c.105.17

d.309

  1. One measure of the inflation rate is the

a.sum of the CPIs of adjacent years.

b.percentage change in the CPI of adjacent years.

c.percentage change in the Real GDP of adjacent years.

d.GDP minus the Real GDP in a year.

  1. Suppose there are five goods in the economy, A-E. The current-year quantity of each is 10A, 20B, 30C, 40D, and 50E. Current-year prices are $1 for each unit of A, $2 for each unit of B, $3 for each unit of C, $4 for each unit of D, and $5 for each unit of E. Base-year prices are $1 for each good. Real GDP in the current year equals ______.

a. $100

b. $130

c. $150

d. $180

e. $550

  1. In year 1 the CPI is 140.1, and in year 2 the CPI is 146.7. From year 1 to year 2, Martha’s salary rises from $32,000 to $34,000, and Chiang’s salary rises from $43,000 to $45,000. Who is “more than keeping up with inflation”?

a.Martha

b. Chiang

c.both Martha and Chiang

d.neither Martha nor Chiang

  1. In year 1 the CPI is 140.1, and in year 2 the CPI is 148.9. If Sarah’s salary was $33,500 in year 1, what salary in year 2 would cause her to exactly “keep up with inflation”?

a.$36,448

b.$42,300

c.$40,508

d.$35,604

  1. In year 1 the CPI is 140.1, and in year 2 the CPI is 148.9. If Dennis’s salary was $63,000 in year 1, what is the minimum salary he must earn in year 2 to “more than keep up with inflation”?

a.$69,281

b. $66,957

c.$71,800

d. $63,625

  1. Suppose that 1967 is the base year for the Consumer Price Index (CPI) and in 1988 the CPI is 340. What does this “340” mean?

a.What cost $100 in 1967 will cost 340 times as much in 1988.

b.What cost $100 in 1967 will cost $340 more in 1988.

c. What cost $100 in 1967 will cost 100/340 (or .2941) times as much in 1988 (that is, it will cost $29.41 in 1988).

d.What cost $100 in 1967 will cost $240 more in 1988.

  1. The “chain-weighted” CPI ______the response of buying behavior to changes in relative prices, and so ______a substitution bias.

a.allows; avoids

b.allows; contains

c.disallows; avoids

d.disallows; contains

  1. Persons who are retired or engaged in own-home housework are considered to be in which of the following categories?

a.in the civilian labor force

b.not in the labor force

c.employed

d.unemployed

  1. Suppose the civilian non-institutional population equals 100,000; there are 62,600 employed persons and 8,100 unemployed persons. How many people are not in the labor force?

a. 8,100

b. 37,400

c. 54,500

d. 29,300

  1. Jones lost his job in industry A, but he has skills that can be transferred to industry B (which is currently hiring). Smith lost a job in industry C, but his skills cannot be transferred to industry B or to any other industry. Jones is ______unemployed and Smith is ______unemployed.

a.structurally; frictionally

b.structurally; structurally

c.frictionally; frictionally

d.frictionally; structurally

  1. Most job searchers

a. accept the first job offer they receive because they cannot be sure that someone else will make an offer in the future.

b. possess good information about job opportunities and thus have a good idea when and where to find a suitable job.

c. continue searching for a job as long as the additional benefits are equal to the additional costs, but quit the search when the two become unequal.

dcontinue the search as long as the additional benefits of the search exceed the additional costs.

  1. The optimal job search time and the unemployment rate

a. usually move up and down together.

b. usually move in opposite directions.

c. always move in opposite directions.

d. are unrelated.

  1. According to the economic theory of job search, if one’s reservation wage rises, his or her

a. optimal search time falls.

b. optimal search time rises.

c. wage offer curve shifts downward and to the right.

d. wage offer curve shifts upward and to the left.

e. b and c

17Look at the following data: GDP = $5,998 billion; investment = $1,322 billion; exports = $300 billion; government purchases = $1,450 billion; consumption = $3,400 billion. What does import spending equal?

a.$400 billion

b.$374 billion

c.$200 billion

d.$274 billion

e.$474 billion

18Look at the following data: consumption = $813 billion; exports = $43 billion; imports = $33 billion; inventory investment = $123 billion; fixed investment = $300 billion; government purchases = $320 billion. What is GDP?

a. $1,632 billion

b. $1,466 billion

c. $1,566 billion

d. $1,599 billion

e.none of the above

19Gross Domestic Product (GDP) is the total market value of all

a. final goods and services produced annually within a country’s borders.

b. final and intermediate goods and services produced annually within a country’s borders.

c. intermediate goods and services produced annually within a country’s borders.

d. final goods and services produced every month within a country’s borders.

20Which of the following illustrates double counting?

a. The total market value of the steel used to produce a car and the total market value of the car itself are summed.

b. The total market value of tennis rackets and the total market value of tennis balls are summed.

c. The total market value of picture frames and the total market value of camera film are summed.

d. The total market value of eyeglasses and the total market value of carpet are summed.

e. b and c

21Which of the following is counted in GDP?

a.the purchase of 100 shares of IBM stock

b.the services of a real estate broker

c.the consumption of leisure by people

d.the sale of a used car

e.none of the above

22Suppose the total market value of all final goods and services produced this year in economy X is $4 million. Of the $4 million worth of goods, $3 million is sold and $1 million is held in inventory. For this year, the GDP for economy X is

a.$4 million.

b.$3 million.

c.$1 million.

d.$7 million.

e.none of the above

23Norman just bought shares of stock in Amazon.com for $1,000 and paid a $45 commission to his broker. How did this affect GDP?

a.It had no impact on GDP.

b.GDP increased by $45.

c.GDP increased by $955.

d.GDP increased by $1,000.

e.GDP increased by $1,045.

24“Economic growth” has occurred if the

a.inflation rate between this year and last year is zero or less.

b.GDP this year exceeds the Real GDP this year.

c.unemployment rate this year is above the natural rate of unemployment.

d.Real GDP or per-capita Real GDP this year exceeds those of last year.

25Why do economists prefer to compare Real GDP figures for various years instead of GDP figures?

a.Because when GDP in one year is higher than in another year, there is no way to tell why it is higher. Is it because output is higher, prices are higher, etc.? This is not the case with Real GDP. If Real GDP is higher in one year than in another year, it is because output is higher.

b.Because when GDP in one year is higher than in another year, there is no way of knowing if the quality of goods produced is higher in one year than the other. This is not the case with Real GDP. If Real GDP is higher in one year than in another year, it is because the quality of the goods produced is higher.

c.Actually the question is incorrect. Economists prefer to compare GDP figures instead of Real GDP figures.

d.Because Real GDP is easier to compute than GDP.

e.Because when GDP in one year is higher than in another year, there is no way to tell if the quality of life is higher in one year than the other. This is not the case with Real GDP. If Real GDP is higher in one year than in another year, it is because the quality of life is higher.

Essay

  1. Explain the three different approaches used to measure GDP.
  1. Explain the substitution-bias inherent in a fixed-weighted price index and the impact this bias has on the reported cost of living.