Principles of Macroeconomics 2e

# Self-Check Questions

1.

Table 9.4 shows the fruit prices that the typical college student purchased from 2001 to 2004. What is the amount spent each year on the “basket” of fruit with the quantities shown in column 2?

Items Qty (2001) Price (2001) Amount Spent (2002) Price (2002) Amount Spent (2003) Price (2003) Amount Spent (2004) Price (2004) Amount Spent
Apples 10 $0.50$0.75 $0.85$0.88
Bananas 12 $0.20$0.25 $0.25$0.29
Grapes 2 $0.65$0.70 $0.90$0.95
Raspberries 1 $2.00$1.90 $2.05$2.13 $2.13 Total Table 9.4 2. Construct the price index for a “fruit basket” in each year using 2003 as the base year. 3. Compute the inflation rate for fruit prices from 2001 to 2004. 4. Edna is living in a retirement home where most of her needs are taken care of, but she has some discretionary spending. Based on the basket of goods in Table 9.5, by what percentage does Edna’s cost of living increase between time 1 and time 2? Items Quantity (Time 1) Price (Time 2) Price Gifts for grandchildren 12$50 $60 Pizza delivery 24$15 $16 Blouses 6$60 $50 Vacation trips 2$400 \$420
Table 9.5
5.

How to Measure Changes in the Cost of Living introduced a number of different price indices. Which price index would be best to use to adjust your paycheck for inflation?

6.

The Consumer Price Index is subject to the substitution bias and the quality/new goods bias. Are the Producer Price Index and the GDP Deflator also subject to these biases? Why or why not?

7.

Go to this website for the Purchasing Power Calculator at MeasuringWorth.com. How much money would it take today to purchase what one dollar would have bought in the year of your birth?

8.

If inflation rises unexpectedly by 5%, would a state government that had recently borrowed money to pay for a new highway benefit or lose?

9.

How should an increase in inflation affect the interest rate on an adjustable-rate mortgage?

10.

A fixed-rate mortgage has the same interest rate over the life of the loan, whether the mortgage is for 15 or 30 years. By contrast, an adjustable-rate mortgage changes with market interest rates over the life of the mortgage. If inflation falls unexpectedly by 3%, what would likely happen to a homeowner with an adjustable-rate mortgage?