1. Inflation typically falls in recession and increases in good times. 2. The GDP deflator is a price index which fixes quantities in the base year. 3. The CPI typically shows a higher rate of inflation than the GDP deflator. 4. If the GDP deflator were 150 in 2022 and goes up to 160 in 2023, the inflation rate calculated in 2023 would be 10 percent. 5. One problem with the GDP deflator is that it neglects the substitution effect. 6. The real interest rate is the nominal interest rate divided by a price index. 7. Unexpected inflation will benefit banks and other lenders. 8. Falling prices automatically benefit all sectors of an economy. 9. Sudden and unexpected deflation is more likely to be harmful to economic growth than sudden and unexpected inflation. 10. Prices of goods and services which are labor-intensive tend to be sticky prices of goods that are raw materials intensive tend to be flexible. b. The CPI is used to measure the cost of a typical basket of goods. The typical household in the Global-Land buys 4 loaves of bread, 3 pounds of cream cheese, and 8 books each week. The prices of these goods in years 2021, 2022, and 2023 and given in the table below: (3 marks each) YEAR Price of a Price of a pound loaf of bread of cream chesse Price of a book 2021 $1 $3 $10 2022 $2 $6 $20 2023 $3 $6 $25 c. Calculate the CPI in 2023 using 2022 as the base year. 2 marks d. Calculate the CPI in 2021 using 2022 as the base year. 2 marks e. Calculate the rate of inflation between 2021 and 2022. 2 marks f. Calculate the rate of inflation between 2022 and 2023. 2 marks g. Describe a reason why the inflation rate between 2022 and 2023 might overstate changes in the cost of living. 7 marks 2
1. Inflation typically falls in recession and increases in good times. 2. The GDP deflator is a price index which fixes quantities in the base year. 3. The CPI typically shows a higher rate of inflation than the GDP deflator. 4. If the GDP deflator were 150 in 2022 and goes up to 160 in 2023, the inflation rate calculated in 2023 would be 10 percent. 5. One problem with the GDP deflator is that it neglects the substitution effect. 6. The real interest rate is the nominal interest rate divided by a price index. 7. Unexpected inflation will benefit banks and other lenders. 8. Falling prices automatically benefit all sectors of an economy. 9. Sudden and unexpected deflation is more likely to be harmful to economic growth than sudden and unexpected inflation. 10. Prices of goods and services which are labor-intensive tend to be sticky prices of goods that are raw materials intensive tend to be flexible. b. The CPI is used to measure the cost of a typical basket of goods. The typical household in the Global-Land buys 4 loaves of bread, 3 pounds of cream cheese, and 8 books each week. The prices of these goods in years 2021, 2022, and 2023 and given in the table below: (3 marks each) YEAR Price of a Price of a pound loaf of bread of cream chesse Price of a book 2021 $1 $3 $10 2022 $2 $6 $20 2023 $3 $6 $25 c. Calculate the CPI in 2023 using 2022 as the base year. 2 marks d. Calculate the CPI in 2021 using 2022 as the base year. 2 marks e. Calculate the rate of inflation between 2021 and 2022. 2 marks f. Calculate the rate of inflation between 2022 and 2023. 2 marks g. Describe a reason why the inflation rate between 2022 and 2023 might overstate changes in the cost of living. 7 marks 2
Chapter17: Inflation
Section: Chapter Questions
Problem 5SQ
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Transcribed Image Text:1. Inflation typically falls in recession and increases in good times.
2. The GDP deflator is a price index which fixes quantities in the base year.
3. The CPI typically shows a higher rate of inflation than the GDP deflator.
4. If the GDP deflator were 150 in 2022 and goes up to 160 in 2023, the inflation
rate calculated in 2023 would be 10 percent.
5. One problem with the GDP deflator is that it neglects the substitution effect.
6. The real interest rate is the nominal interest rate divided by a price index.
7. Unexpected inflation will benefit banks and other lenders.
8. Falling prices automatically benefit all sectors of an economy.
9. Sudden and unexpected deflation is more likely to be harmful to economic
growth than sudden and unexpected inflation.
10. Prices of goods and services which are labor-intensive tend to be sticky
prices of goods that are raw materials intensive tend to be flexible.
b. The CPI is used to measure the cost of a typical basket of goods. The typical household
in the Global-Land buys 4 loaves of bread, 3 pounds of cream cheese, and 8 books each
week. The prices of these goods in years 2021, 2022, and 2023 and given in the table
below: (3 marks each)
YEAR Price of a
Price of a pound
loaf of bread
of cream chesse
Price of
a book
2021
$1
$3
$10
2022
$2
$6
$20
2023
$3
$6
$25
c. Calculate the CPI in 2023 using 2022 as the base year. 2 marks
d. Calculate the CPI in 2021 using 2022 as the base year. 2 marks
e. Calculate the rate of inflation between 2021 and 2022. 2 marks
f. Calculate the rate of inflation between 2022 and 2023. 2 marks
g. Describe a reason why the inflation rate between 2022 and 2023 might overstate
changes in the cost of living. 7 marks
2
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