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econ practice problems
Principles of Economics: Macroeconomics (ECON 2020)
University of Virginia
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Multiple Choice Questions 1. The price index used to calculate most cost-of-living adjustments is the: a. consumer price index. b. producer price index. c. GDP deflator. d. NDP deflator. Answer: a 2. The consumer price index is computed by comparing the cost of the typical market basket of goods purchased during a base year (evaluated at base year prices) with: a. The cost of the same market basket evaluated at current prices. b. The cost of the current market basket evaluated at base-year prices. c. The cost of the current market basket evaluated at current prices. d. The cost of the same market basket evaluated at base year prices. Answer: a 3. A price index in years after the base year: a. Is never 100. b. Is always greater than 100. c. Is always less than 100. d. Can be less than, greater than, or equal to 100. Answer: d 4. If the CPI increased from 80 to 84, the rate of inflation is: a. 4 percent. b. 5 percent. c. 10 percent. d. 20 percent. Answer: b 5. In 1969, the United States CPI was 37 (1982-84=100) and in 1999 it was 166. From these figures we can conclude that in the United States prices increased about ______ percent between 1969 and 1999. a. 80 b. 125 c. 210 d. 350 Answer: d 6. If the consumer price index (CPI) at the end of 1990 was 125 and the CPI at the end of 2000 was 133, then the rate of inflation over the time period was: a. zero (prices were stable during this period). b. 4 percent. c. 6 percent. d. 8 percent. Answer: c 7. Unexpected inflation will: a. Hurt borrowers. b. Hurt lenders. c. Hurt borrowers and lenders equally. d. Have no effect on either borrowers or lenders. Answer: b Long Problem Suppose the economy of UVA produces 5 goods, but only cherries, chocolate, and ice cream are consumer goods. Woods and coal are also final goods, but are not bought by consumers. The total production of all goods is given in the following table followed by their respective prices: Years Items Cherries Chocolate Ice cream Wood Coal 2000 Quantity Price $ 8 10 12 5 11 4 3 2 8 4 2001 Quantity Price $ 9 15 13 6 13 6 3 3 8 5 2002 Quantit Price $ y 10 6 15 4 15 3 8 9 14 5 2003 Quantit Price $ y 15 7 20 5 17 4 10 9 16 6 Using these data, answer the following questions: a) Taking 2000 as the base year, compute the cost of the consumption basket for years 2000 through 2003. b) Compute the CPI for each year. c) Compute the rate of inflation based on the CPI for all years d) Compute the nominal GDP for each year. e) Compute the real GDP for each year f) Compute GDP deflators for all years g) Compute the rate of inflation based on the GDP deflator for all years. h) Compare the inflation rates you’ve calculated based on the CPI and the GDP deflator. How do you explain the differences? i) Compute the price for cherries for 2000, 2001, and 2002 in 2003 dollars j) Compute the price for cherries for 2001, 2002, and 2003 in 2000 dollars k) For part i and j, comment on the difference in prices compared to each year actual price. l) The following table gives the aggregate nominal income of middle class citizens in this economy. In which year did they have the highest well-being? Comment Year 2000 2001 2002 2003 Income $90 $155 $185 $230 Answers Years 2000 2001 2002 2003 Cost of the consumption basket ($) 86 114 124 154 CPI 100 132 144 179 Rate of inflation based on the CPI (%) - 32 8 24 Nominal GDP ($) 170 251 307 459 Real GDP ($) 170 207 235 298 GDP Deflator 100 121 130 154 Rate of inflation based on the GDP deflator (%) - 21 7 17 Cost of Consumption Basket: We use 2000 quantity as the base quantity. This is because CPI is a measure of the price level based on the consumption pattern of a typical consumer (“fixed” basket of good) ----Thanks to everyone who pointed this out! So to compute CPI, we multiply the current year price by the base year (2000) quantity and we sum over the goods. Note that for the consumption basket, we only need cherries, chocolates, and ice cream since those are the consumer goods. For example, Cost of Consumption Basket in 2002 = (8*6)+(10*4)+(12*3) = 124 CPI = (Basket price / Basket price in the base year) *100 Note that it is not always the case that having the highest income will mean having the highest well-being. In this exercise it happens that they have the highest income in 2003 and also have the highest well-being in that same year. Suppose the price level for 2003 was actually 200. In that case the real income would have been 230/200 = 1. In this case, they would have not had the highest well-being despite having the highest income in this year.
econ practice problems
Course: Principles of Economics: Macroeconomics (ECON 2020)
University: University of Virginia
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