Essentials of Economics (MindTap Course List)
8th Edition
ISBN: 9781337091992
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 16, Problem 4CQQ
To determine
Thesubstitution effect with
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Because consumers can sometimes substitutecheaper goods for those that have risen in price,a. the CPI overstates inflation.b. the CPI understates inflation.c. the GDP deflator overstates inflation.d. the GDP deflator understates inflation.
What is the relationship between the CPI and the inflation rate?
When the CPI _______.
A.
is constant, the inflation rate is negative
B.
falls, the inflation rate is positive and low
C.
rises slowly, the inflation rate is low
D.
rises slowly, the inflation rate is negative
The table shows the quantities of the goods Suzie
bought and the prices she paid during two consecutive
weeks.
Suzie's CPI market basket contains the goods she
bought in Week 1.
Calculate the cost of Suzie's CPI market basket in Week
1 and in Week 2.
What percentage of the CPI market basket is gasoline?
Calculate the value of Suzie's CPI in Week 2 and her
inflation rate in week 2.
The cost of her CPI market basket in Week 2 is $ 95.75.
>>> Answer to 2 decimal places.
Gasoline is 36.3 percent of the CPI market basket.
>>> Answer to 1 decimal place.
Week 1
Item
The cost of Suzie's CPI market basket in Week 1 is $ 103.25.
>>> Answer to 2 decimal places.
The value of Suzie's CPI in Week 2 is
>>> Answer to 1 decimal place.
Coffee
Books
Gasoline
Week 2
Item
Coffee
Books
Gasoline
Concert
Quantity
13 cups
1
15 gallons
Quantity
13 cups
2
5 gallons
1 ticket
Price
$2.75 a cup
$30.00 each
$2.50 a gallon
Price
$2.75 a cup
$15.00 each
$3.00 a gallon
$95 each
Chapter 16 Solutions
Essentials of Economics (MindTap Course List)
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- The table shows the quantities of the goods Suzie bought and the prices she paid during two consecutive weeks. Suzie's CPI market basket contains the goods she bought in Week 1. Calculate the cost of Suzie's CPI market basket in Week 1 and in Week 2. What percentage of the CPI market basket is gasoline? Calculate the value of Suzie's CPI in Week 2 and her inflation rate in week 2. The cost of Suzie's CPI market basket in Week 1 is $ >>> Answer to 2 decimal places. m Week 1 Item Coffee Books Gasoline Week 2 Item Coffee Books Gasoline Concert Quantity 8 cups 1 25 gallons Quantity 8 cups 4 15 gallons 1 ticket Price $4.00 a cup $25.00 each $2.00 a gallon Price $4.00 a cup $12.50 each $2.50 a gallon $95 eacharrow_forwardPlease solve weeks 1 and 2 percentage of the CPI market basket.arrow_forward7) In 2010, a bottle of Coke cost $1. In 2020, it would cost $1.50. The CPI for 2020 was 260 and the CPI for 2010 was 220. Which of the following statements is correct? A) The real price of Coke stayed the same. B) The real price of Coke decreased. C) The real price of Coke increased. D) The nominal price of Coke stayed the same.arrow_forward
- If inflation is expected to increase, A. the nominal interest rate will increase. B. the nominal interest rate will decrease. C. the real interest rate will increase. D. the nominal interest rate will remain the samearrow_forwardIn a simple economy, people consume only two goods: food and clothing. The market basket of goods used to compute the CPI has 50 units of food and 10 units of clothing. Food Clothing Last year's price $4 $8 This year's price $6 $16 a. What are the percentage increases in the price of food and in the price of clothing? b. What is the percentage increase in the CPI? c. Do these price changes affect all consumers to the same extent? Explainarrow_forwardPlease answer a and barrow_forward
- 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…arrow_forwardWhat does it mean when the CPI is higher this year than last? Select one: a. The rate of inflation has increased. b. There has been inflation since last year. c. Real prices have increased. d. Real prices have decreased.arrow_forwardWhat information is given by the CPI? The CPI tells us _______. A. the price level in a given period expressed as a percentage of the price level in the base period, which equals zero B. the price level in a given period expressed as a percentage of the price level in the base period, which equals 100 C. the inflation rate in a given period compared to the inflation rate in the base period, which equals 100 D. the inflation rate in a given period compared to the inflation rate in the base period, which equals zeroarrow_forward
- What type of bias might be introduced if the CPI only represents the change in the price of a gallon of gas? A. new goods bias B. quality change bias C. commodity substitution bias D. outlet substitution biasarrow_forwardOver a long period of time, the price of a candybar rose from $0.20 to $1.20. Over the same period,the CPI rose from 150 to 300. Adjusted for overallinflation, how much did the price of the candy barchange?arrow_forwardPlease dont answer Question 1. Just the scenario for Question 2. Computing the CPI: 1. The table below shows a hypothetical typical consumer’s market basket that consists of 10 units of beef and 20 units of chicken. Year Price of Beef Price of Chicken 2018 $4 $4 2019 $5 $5 2020 $9 $6 A. Compute the CPI in 2019. B. What is the CPI inflation rate from 2019-2020? CPI vs. GDP deflator: 2. In each scenario, determine the effects on the CPI and the GDP deflator: A. Starbucks raises the price of Frappuccino (assuming Frappuccino is in the CPI basket). B. Caterpillar raises the price of the industrial tractors it manufactures at its Illinois factory. C. Armani raises the price of the Italian jeans it sells in the U.S. (assuming this good is included…arrow_forward
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