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 inflationrate 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 economicgrowth 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 householdin the Global-Land buys 4 loaves of bread, 3 pounds of cream cheese, and 8 books eachweek. The prices of these goods in years 2021, 2022, and 2023 and given in the tablebelow: YEAR Price of aloaf of breadPrice of a poundof cream chessePrice ofa book2021 $1 $3 $102022 $2 $6 $202023 $3 $6 $25c. Calculate the CPI in 2023 using 2022 as the base year. d. Calculate the CPI in 2021 using 2022 as the base year. e. Calculate the rate of inflation between 2021 and 2022. f. Calculate the rate of inflation between 2022 and 2023. g. Describe a reason why the inflation rate between 2022 and 2023 might overstatechanges in the cost of living.
1. Inflation typically falls in recession and increases in good times.
________ 2. The
________ 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:
YEAR Price of a
loaf of bread
Price of a pound
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.
d. Calculate the CPI in 2021 using 2022 as the base year.
e. Calculate the rate of inflation between 2021 and 2022.
f. Calculate the rate of inflation between 2022 and 2023.
g. Describe a reason why the inflation rate between 2022 and 2023 might overstate
changes in the cost of living.
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