question

A rise in the price level indicates

answer

inflation

question

When inflation occurs, purchasing power will ____, the value of the dollar will ____.

answer

erode; decrease

question

Name 2 price indexes that are used to measure inflation.

answer

GDP Deflator & CPI

question

When purchasing power falls, this means _____.

answer

a dollar buys fewer goods and services

question

Why did $20 in 1970 buy more goods and services than $20 will buy in 2017?

answer

Inflation, A drop in the dollar's purchasing power, the value of a dollar fell

question

Suppose you were born in 1996. The CPI for that year was 156. The CPI for July 2017 is 244.

a. calculate how much prices have risen from 1996 to 2017.

b. if your mother earned $30,000 a year in 1996 and she received COLA salary increases each year (and no other raises), what would she be earning in 2017?

a. calculate how much prices have risen from 1996 to 2017.

b. if your mother earned $30,000 a year in 1996 and she received COLA salary increases each year (and no other raises), what would she be earning in 2017?

answer

a. (244-156)/156 *100 = 56%

b. $30,000(244/156) = $46,923.08

b. $30,000(244/156) = $46,923.08

question

Sample CPI Basket: 2 haircuts and 10 gallons of gas

See Graph on Paper!!

Complete the table. The base year is 2008.

See Graph on Paper!!

Complete the table. The base year is 2008.

answer

Cost of basket:

$50

$44

$70

Index:

114

100

159

$50

$44

$70

Index:

114

100

159

question

Sample CPI Basket: 2 haircuts and 10 gallons of gas

See Graph on Paper!!

What are the inflation rates for: 2008? _____; 2009? ____

See Graph on Paper!!

What are the inflation rates for: 2008? _____; 2009? ____

answer

-12% (100-114/114)

**100 = -12; 59% (159-100/100)**100 = 59question

Sample CPI Basket: 2 haircuts and 10 gallons of gas

See Graph on Paper!! Was there a year with deflation? _____ If so, which one?_____

See Graph on Paper!! Was there a year with deflation? _____ If so, which one?_____

answer

yes, 2008 was -12%

question

The GDP Deflator and CPI:

a. Which one uses surveys of households in its calculations?

b. Which one uses a basket of goods that changes each year?

c. Which one allows people to substitute cheaper goods from year to year in its calculations?

d. Which one is more accurate?

e. Which one is used to adjust Social Security checks for inflation?

f. Which one overstates the amount of inflation?

g. Which is used to measure inflation?

h. Which is most commonly used?

i. Which price index = 100 in the base year?

a. Which one uses surveys of households in its calculations?

b. Which one uses a basket of goods that changes each year?

c. Which one allows people to substitute cheaper goods from year to year in its calculations?

d. Which one is more accurate?

e. Which one is used to adjust Social Security checks for inflation?

f. Which one overstates the amount of inflation?

g. Which is used to measure inflation?

h. Which is most commonly used?

i. Which price index = 100 in the base year?

answer

a. both

b. GDP

c. GDP

d.GDP

e. CPI

f. CPI

g. both

h. CPI

i. both

b. GDP

c. GDP

d.GDP

e. CPI

f. CPI

g. both

h. CPI

i. both

question

Suppose you read in the paper that the US CPI inflation rate for the year is 6.6%. Did the cost of living for the typical US consumer really rise 6.6%? ____ Explain.

answer

No, its overstated ~1%, so 5.5%.

question

True or False. Deflation is bad news for an economy because when prices begin falling, household consumers will stop spending and wait for prices to fall further before buying many goods and services. And when consumption spending (C) decreases, GDP will decrease.

answer

TRUE

question

Marcia currently makes $50,000 a year. Inflation was 5% last year and Marcia has a COLA in her labor contract, what will be her raise in dollars? ____

What will her salary be in the new year? ____

What will her salary be in the new year? ____

answer

2,500 (50,000*.05); $52,500

question

You win the $8 million Georgia lottery. You can get $1 million a year for 8 years or $8 million total today. Ignoring taxes, which is the better choice if you expect moderate to high inflation in the next 8 years? Why?

answer

You want all at once because inflation decreases the value of the dollar overtime.

question

When a figure is indexed to inflation, this means, __________

Examples?__________

Are social security recipients hurt by inflation? ________

Examples?__________

Are social security recipients hurt by inflation? ________

answer

the dollar amount is adjusted; contract (COLA), law (Social Security); no they come out even

question

Sarah puts $3,000 in an investment account paying 2% annual interest. If the inflation rate is 7%, what is the real rate of interest? _____ Is her purchasing power rising or falling over the investment year? ___ Is she worse off or better off this year compared with last year? ____

answer

-5; falling; worse off

question

In order to improve their financial situation, savers need the nominal rate of interest to ___ the inflation rate.

answer

be better/ beat

question

The US treasury bill rate of annual interest on 9-17-08 was 0.07%. US inflation was at 5.4%. What was the real return for the investors of US T-bills on that date?

answer

-5.33

.07-5.4 = 5.33

.07-5.4 = 5.33

question

If the inflation rate is 9%, in how many years will average prices double?

answer

72/9 = 8 years

question

If the inflation rate is 144%, in how many years will average prices double?

answer

72/144 = .6; 6 months

question

Suppose you buy a house for $100,000 in 2014. If the average inflation rate is 9% and the price of the house rises exactly with inflation, in how many years will it be worth $200,000?

answer

72/9 = 8 years

question

If inflation is 5% and Erica gets a 3% raise, is she worse off or better off than the year before? ____

answer

worse

because 3% less than 5%

because 3% less than 5%

question

Explain how John earned a -5% real return on his investments, even though he earned 9% interest from the investment.

answer

Because inflation is higher than what he earned, inflation rate = 14%

question

If Megan has a regular checking account and inflation was 7% for the year, what was her real return?

answer

-7% because she's getting 0 and 0-7 = -7