Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN: 9781285165875
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Question
Chapter 24, Problem 4QCMC
To determine
Thesubstitution effect with CPI and GDP deflator.
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Students have asked these similar questions
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 24 Solutions
Principles of Economics, 7th Edition (MindTap Course List)
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Similar questions
- 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
- What is a consequence that arises from the CPI bias? A. A wage contract linked to the CPI gives workers less income than the firm intended. B. The bias in the CPI decreases government outlays. C. Tax adjustments based on the CPI decrease the amount paid in taxes. D. The bias in the CPI eliminates the need for people to shop in discount stores.arrow_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_forward1. 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_forward
- What 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_forwardWhat 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_forward
- Over 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_forwardSuppose the price of a quart of milk rises from $1.00 to $1.20 and the price of a T-shirt rises from $8.00 to $9.60. If the CPI rises from 150 to 195, then people likely will buy (Note that this is not a two goods economy anymore) a.more milk and more T-shirts. b.more milk and fewer T-shirts. c.less milk and more T-shirts. d.less milk and fewer T-shirts. Suppose the price of a gallon of ice cream rises from $4 to $5 and the price of a can of coffee rises from $2 to $2.50. If the CPI rises from 150 to 177, then people likely will buy a.more ice cream and more coffee. b.more ice cream and less coffee. c.less ice cream and more coffee. d less ice cream and less coffee. Can you please explain how we got answer a for the first question and d for the second one. Thank you.arrow_forward
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