ECON 0110 Lecture Notes - Lecture 8: Market Basket

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13 Feb 2015

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To create a price index, choose some year to be the base year, say, year 0. Determine a representative set of quantities of items q0 that were purchased by consumers during the base year. Calculate the total cost of those base year quantities q0 using current year prices, pi. Index for year n is equal to: (pnq0/p0q0) x 100. Example: use the data in the following table: Quantity quantity price in 1983 in 1983 current current of 1983 relative. Step 1: choose a base year and determine a market basket full of a quantity of goods and services using base year quantities. In our example, the base year is 1983 and the quantities are 100 units of food and 50 units of clothes. Step 2: list the current year prices during each year. For example, during 1960, the price of one unit of food is . 00 and the price of one unit of clothes is . 00.

Related Questions

8. Which of the following items is included in the calculation of GDP?

a.Purchase of a used car.

b.Purchase of 100 shares of General Motors stock.

c.Purchase of an intermediate good.

d.None of the above would be included

9. Difference between Real and Nominal GDP is:

a.Change in price level from base year to current year

b.Measured by excluding some of the sectors

c.That real GDP is always smaller than Nominal GDP

d.None of the above

10. GDP in an economy is $11,050 billion. Consumer expenditures are $7,735 billion, government purchases are $1,989 billion, and gross investment is $1,410 billion. Net exports are:

a.+$53 billion

b.-$84 billion

c.-$47 billion

d.-$161 billion

11. Equality (As a tool of measurement for quality of life) refers to a balance of Economic and Political Power between which two groups?

a.Homeless and Employed

b.Men and Women

c. Different ethnic groups

d. Rich and Poor

12.What is inflation?

a.A fall in the general level of prices occurs, workers need more money to pay for goods, clothing, and shelter

b.A rise in the general level of prices occurs, workers need more money to pay for goods, clothing, and shelter

c.A rise in the general level of prices occurs, workers need less money to pay for goods, clothing and shelter

d.A fall in the general level of prices occurs, workers need less money to pay for goods, clothing and shelter

13.Which of the following is the best measure of how inflation affects consumers?

A.The increase in the price of gold

B. The increase in the consumer price index

C. The increase in the price of a single product

D. The decrease in the consumer price index

14. The Consumer Price Index (CPI)

a. Measures the rate of output in the economy over one year.

b.Measures the increase in wholesale prices since a base year.

c.Is deficient because it does not include medical prices.

d.Is used to calculate the rate of inflation over a given period.

15.How is the unemployment rate computed?

a. Number of unemployed persons divided by the number of economically active (i.e. employed and unemployed) persons aged fifteen years and over.

b.Number of unemployed persons divided by the number of people aged fifteen years and over.

c.Number of unemployed persons divided by the number of employed persons aged fifteen years and over.

d.None of the above

byzantiumotter67

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.

1. The peak of the business cycle

a. usually occurs when the natural rate of unemployment is equal to its actual rate.

b. is the point where an expansion ends and a recession begins

c. is the minimum level of nominal GDP.

2. The consumer price index (CPI) reflects

a. the median annual expenditures of a typical single family of four on consumer goods

b. the average price of all goods and services computed from the ratio of nominal GDP to real GDP.

c. the changes in the prices of goods and services typically purchased by consumers.

3. The Consumer Price Index is NOT used

a. to measure the average price level of all final goods and services produced

b. to compute the U.S. inflation rate.

c. to measure changes in the cost of living

4. Which of the following is true of a price index that uses a fixed market basket?

a. It excludes new goods and services

b. It accurately predicts the impact of rising prices when purchases are made at superstores.

c. It overstates the importance of items that fall in price.

5. A quality-change bias in the construction of the CPI arises because

a. big box stores that carry electronic goods routinely run sales to reduce their inventories before stocking new models.

b. consumers also shop at superstores or outlet stores

c. newer versions of a product might be more expensive but could also be better than the older version.

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ECON 0110 Lecture Notes - Lecture 8: Market Basket

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