Name ________________________________________please circle your section è 9:30AM or 6PM

 

 ECON 2105 Principles of Macroeconomics

Problem Set 4 mankiw chapter 24

dUE fRIDAY 18:00 february 6, 2009

 

Directions: Print this answer sheet out at your computer. Work individually or in a group with a maximum of three people. A group will submit one answer sheet with each group member’s name at the top. Read each question carefully. Each question has only one correct answer. Place the letter that corresponds to the correct answer alongside the number that corresponds to the question on the problem set on this answer sheet. Turn in only the answer sheet no later than 18:00 of the date indicated above.

 

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ECON 2105 Principles of Macroeconomics

Problem Set 4 mankiw chapter 24

dUE fRIDAY 18:00 february 6, 2009

 

Table 24-1

year

Peaches

Pecans

2005

$11 per bushel

$6 per bushel

2006

$9 per bushel

$10 per bushel

 

____               1.     Refer to Table 24-1. Suppose the typical consumer basket consists of 10 bushels of peaches and 15 bushels of pecans. Using 2005 as the base year, the CPI for 2006 is

a.

100.

b.

120.

c.

200.

d.

240.

 

Table 24-2

Year

Price of pork

Price of corn

2005

$20

 $12

2006

$25

 $18

 

____               2.     Refer to Table 24-2. Suppose the basket of goods in the CPI consisted of 3 units of pork and 4 units of corn. What is the consumer price index for 2006 if the base year is 2005?

a.

73.47

b.

109.22

c.

136.11

d.

150.00

 

In the country of Shem, the CPI is calculated using a market basket consisting of 5 apples, 4 loaves of bread, 3 robes and 2 gallons of gasoline. The per-unit prices of these goods have been as follows:

 

Table 24-3

Year

Apples

Bread

Robes

Gasoline

2002

$1.00

$2.00

$10.00

$1.00

2003

$1.00

$1.50

$9.00

$1.50

2004

$2.00

$2.00

$11.00

$2.00

2005

$3.00

$3.00

$15.00

$2.50

 

____               3.     Refer to Table 24-3. Using 2002 as the base year, what was the inflation rate between 2003 and 2004?

a.

28.5 percent

b.

34.2 percent

c.

47 percent

d.

It is impossible to determine without knowing the base year.

 

Table 24-4

The table below pertains to an economy with only two goods -- books and calculators. The fixed basket consists of 5 books and 10 calculators.

 

Year

Price of books

Price of calculators

2006

$24

$8

2007

  30

12

2008

  32

15

____               4.     Refer to Table 24-4. Using 2007 as the base year, the consumer price index is

a.

78.22 in 2006, 100 in 2007, and 121.10 in 2008.

b.

74.07 in 2006, 100 in 2007, and 114.81 in 2008.

c.

100 in 2006, 135 in 2007, and 155 in 2008.

d.

200 in 2006, 270 in 2007, and 310 in 2008.

 

____               5.     In an imaginary economy, consumers buy only hot dogs and hamburgers. The fixed basket consists of 10 hot dogs and 6 hamburgers. A hot dog cost $3 in 2006 and $5.40 in 2007. A hamburger cost $5 in 2006 and $6 in 2007. Which of the following statements is correct?

a.

When 2006 is chosen as the base year, the consumer price index is 90 in 2007.

b.

When 2006 is chosen as the base year, the inflation rate is 150 percent in 2007.

c.

When 2007 is chosen as the base year, the consumer price index is 100 in 2006.

d.

When 2007 is chosen as the base year, the inflation rate is 50 percent in 2007.

 

____               6.     If this year the CPI is 125 and last year it was 120, then

a.

the cost of the CPI basket of goods and services has increased this year by 4.17 percent.

b.

the price level as measured by the CPI has increased by 4.17 percent.

c.

the inflation rate for this year is 4.17 percent.

d.

All of the above are correct.

 

____               7.     The price index in the first year is 150; in the second year it is 160; and in the third year it is 175. The inflation rate is about

a.

1.07 percent between the first and second years, and 1.09 percent between the second and third years.

b.

5.4 percent between the first and second years, and 9.4 percent between the second and third years.

c.

6.7 percent between the first and second years, and 9.4 percent between the second and third years.

d.

10 percent between the first and second years, and 1.09 percent between the second and third years.

 

____               8.     Which of these changes in the price index produces the greatest rate of inflation: 106 to 112, 112 to 118, or 118 to 124?

a.

106 to 112

b.

112 to 118

c.

118 to 124

d.

All three changes show the same rate of inflation.

 

____               9.     When the quality of a good improves, the purchasing power of the dollar

a.

increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.

b.

increases, so the CPI understates the change in the cost of living if the quality change is not accounted for.

c.

decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.

d.

decreases, so the CPI understates the change in the cost of living if the quality change is not accounted for.

 

____               10.  Suppose lawn mowers are part of the market basket used to compute the CPI. Suppose also that the quality of lawn mowers improves while the price of lawn mowers stays the same. If the Bureau of Labor Statistics is able to precisely adjust the CPI for the improvement in quality, then, other things equal,

a.

the CPI will rise.

b.

the CPI will fall.

c.

the CPI will stay the same.

d.

lawn mowers will no longer be included in the market basket.

____               11.  An important difference between the GDP deflator and the consumer price index is that

a.

the GDP deflator reflects the prices of goods and services bought by producers, whereas the consumer price index reflects the prices of goods and services bought by consumers.

b.

the GDP deflator reflects the prices of all final goods and services produced domestically, whereas the consumer price index reflects the prices of some goods and services bought by consumers.

c.

the GDP deflator reflects the prices of all final goods and services produced by a nation's citizens, whereas the consumer price index reflects the prices of final goods and services bought by consumers.

d.

the GDP deflator reflects the prices of all goods and services bought by producers and consumers, whereas the consumer price index reflects the prices of final goods and services bought by consumers.

 

____               12.  By itself, a reduction in the price of large tractors imported into the United States from Russia

a.

decreases the GDP deflator and increases the consumer price index.

b.

increases the GDP deflator but leaves the consumer price index unchanged.

c.

increases both the GDP deflator and the consumer price index.

d.

leaves both the GDP deflator and the consumer price index unchanged.

 

____               13.  A German automobile company produces cars in the United States, with some of those cars being exported to other nations and some of them being sold within the United States. If the prices of these cars increase, then

a.

the GDP deflator and the CPI will both increase.

b.

the GDP deflator will increase and the CPI will be unchanged.

c.

the GDP deflator will be unchanged and the CPI will increase.

d.

the GDP deflator and the CPI will both be unchanged.

 

____               14.  Suppose the CPI was 95 in 1955, and suppose currently the CPI is 475. According to the CPI, $100 today purchases the same amount of goods and services as

a.

$20.00 purchased in 1955.

b.

$33.33 purchased in 1955.

c.

$47.50 purchased in 1955.

d.

None of the above is correct.

 

____               15.  The 2005 CPI was 196 and the 1982 CPI was 96.5. If your parents put aside $1,000 for you in 1982, how much would you have needed in 2005 in order to buy what you could have bought with the $1,000 in 1982?

a.

$1,834.20

b.

$2,031.09

c.

$2,308.89

d.

None of the above is correct.

 

____               16.  Renee earned a salary of $60,000 in 2001 and $80,000 in 2006. The consumer price index was 177 for 2001 and 221.25 for 2006. Renee's 2006 salary in 2001 dollars is

a.

$45,198; thus, Renee's purchasing power decreased between 2001 and 2006.

b.

$64,000; thus, Renee's purchasing power increased between 2001 and 2006.

c.

$64,000; thus, Renee's purchasing power decreased between 2001 and 2006.

d.

$75,000; thus, Renee's purchasing power increased between 2001 and 2006.

 

____               17.  In 1969, Don bought a Dodge Dart for $2,500. He drove this car until 2003 when he bought a Honda Civic for $18,000. If the price index in 1969 was 36.7 and the price index in 2006 was 180, what is the price of the Dodge Dart in 2006 dollars?

a.

$3,583

b.

$4,500

c.

$9,762

d.

$12,262

 

____               18.  Tiffany is offered a Job in Minneapolis that pays $80,000. She is offered a similar job in Memphis that pays $64,000. Which set of CPIs would make the two salaries have almost the same purchasing power?

a.

90 in Minneapolis and 80 in Memphis

b.

90 in Minneapolis and 72 in Memphis

c.

90 in Minneapolis and 66 in Memphis

d.

None of the above is correct.

 

____               19.  Mavis Corporation has an agreement with its workers to index completely the wage of its employees to the CPI. Mavis currently pays its production line workers $7.50 an hour and is scheduled to index their wages today. If the CPI is currently about 130 and was 120 a year ago, Mavis should increase the hourly wages of its workers by about

a.

$0.075.

b.

$0.10.

c.

$0.58.

d.

$0.63.

 

____               20.  Which of the following statements is correct about the relationship between the nominal interest rate and the real interest rate?

a.

The real interest rate is the nominal interest rate times the rate of inflation.

b.

The real interest rate is the nominal interest rate minus the rate of inflation.

c.

The real interest rate is the nominal interest rate plus the rate of inflation.

d.

The real interest rate is the nominal interest rate divided by the rate of inflation.

 

____               21.  If the nominal interest rate is 6 percent and the rate of inflation is 9 percent, then the real interest rate is

a.

15 percent.

b.

3 percent.

c.

-3 percent.

d.

-15 percent.

 

____               22.  The real interest rate tells you

a.

how fast the number of dollars in your bank account rises over time.

b.

how fast the purchasing power of your bank account rises over time.

c.

the number of dollars in your bank account today.

d.

the purchasing power of your bank account today.

 

The following questions are True-False and deal with chapters 21, 22, 23 in Miller et al. Mark a “T” or an “F” alongside the appropriate question number on the answer sheet.

 

23. Acreage restriction programs have been a successful method to limit the supply of farm products coming to market, increasing commodity prices, and thus decreasing the amount of tax payer monies used to subsidize American farmers.

 

24.   Higher CAFÉ standards have encouraged American automobile companies to produce and American car buyers to purchase more fuel efficient cars.

 

25. A large police presence in a city is most effective in decreasing petty crimes but has little impact on violent crime rates.