Question 1

The chained consumer price index

Accepted Answer

The chained consumer price index adjusts the quantities of the typical bundle purchased each month to reflect the substitution away from goods that have become more expensive. It is designed to provide a more accurate measure of inflation than the regular consumer price index and will generally result in a lower measured rate of inflation. Therefore, option A is incorrect. Option C is incorrect as the chained consumer price index reflects changes in the prices of a specific basket of goods and services. Option D is incorrect as the chained consumer price index generally results in a lower measured rate of inflation.

Question 2

Which of the following is the major difference between the chained consumer price index and the regular consumer price index?

Accepted Answer

The major difference between the chained consumer price index and the regular consumer price index is that the chained index makes allowance each month for shifts away from goods that have become more expensive, while the regular consumer price index fails to adjust for these shifts. This means that the chained index is more dynamic and better reflects actual consumer behavior over time.

Question 3

If nominal or money GDP increases 6 percent in 2011 (compared to 2010), and real GDP increases 4 percent over the same period, which of the following must be true?

Accepted Answer

The difference between the nominal GDP growth rate (6%) and the real GDP growth rate (4%) is the inflation rate, which is 2%.

Question 4

When adjusting nominal GDP for price changes, it is preferable to use the GDP deflator rather than the consumer price index because the GDP deflator is

Accepted Answer

The GDP deflator is a more general index that measures price changes in all goods and services produced in an economy, whereas the consumer price index focuses only on a specific basket of goods typically purchased by households. Therefore, the GDP deflator is a better measure for adjusting nominal GDP for price changes as it includes a broader range of goods and services.

Question 5

The reporter on one broadcast network says 2011 GDP increased to an all-time high. Commenting on the same figure, a second reporter says GDP in 2011 was less than in 2010. Which of the following explanations is consistent with the statements of both reporters?

Accepted Answer

The first reporter was referring to nominal GDP, which includes the effects of inflation, while the second reporter was referring to real GDP, which is adjusted for inflation. Therefore, it is possible for nominal GDP to increase while real GDP decreases.

Question 6

Your father tells you he earned $3.00 per hour when he was 16 in 1977; you remember making $6.00 per hour when you were 16 in 1999. Given that the CPI was 36.7 in 1977 and 166.1 in 1999, which of the following is the 1999 real equivalent of your father's hourly earnings when he was 16?

Accepted Answer

The answer of Your father tells you he earned $3.00...

Question 7

Real GDP equals nominal GDP

Accepted Answer

Real GDP is adjusted for changes in the price level using a price index, such as the Consumer Price Index (CPI) or the Gross Domestic Product Deflator (GDP deflator), in order to determine the actual growth of the economy. Therefore, option B is the correct answer.

Question 8

Which of the following is true of the chained consumer price index?

Accepted Answer

The chained consumer price index considers changes in consumption patterns as prices fluctuate, resulting in a slightly lower inflation rate than the regular consumer price index.

Question 9

The change in nominal GDP will always exceed the change in real GDP when nominal GDP is

Accepted Answer

The change in nominal GDP will always exceed the change in real GDP when nominal GDP is increasing and prices are increasing because nominal GDP includes the effects of both price changes and changes in production, while real GDP measures only changes in production. Therefore, when prices are increasing, the increase in nominal GDP will reflect both the increase in production and the increase in prices, resulting in a larger change than in real GDP.

Question 10

If nominal GDP increases 4 percent during a year, and real GDP increases 7 percent during the same year, which of the following must by true?

Accepted Answer

The GDP deflator is calculated as (Nominal GDP/Real GDP) x 100. If real GDP increases more than nominal GDP, it indicates a decrease in the price level, suggesting deflation.

Question 11

When economists speak of changes in GDP measured in constant dollars, they mean that

Accepted Answer

Changes in GDP measured in constant dollars mean that a price index has been used to adjust money GDP for the effects of inflation. This allows for a more accurate comparison of GDP over time, as the reported values reflect changes in real output rather than changes in prices.

Question 12

If you wanted to compare the quantity of output of a country across time periods, which of the following would you use?

Accepted Answer

Real GDP would be the best choice as it adjusts for inflation and allows for accurate comparison of output across different time periods. The consumer price index measures changes in prices of goods and services over time, but does not specifically measure output. Nominal GDP measures output in current prices without adjusting for inflation, so it cannot be accurately compared across different time periods. The GDP deflator is similar to the consumer price index, but specifically measures changes in prices of goods and services that are included in GDP. While it can be used to adjust nominal GDP to real GDP, it is not as commonly used as other measures such as the Consumer Price Index.

Question 13

Suppose, in dollar terms, nominal GDP increased approximately 4 percent during a given year, and real GDP decreased 1 percent. Which of the following best explains these events?

Accepted Answer

Nominal GDP accounts for both changes in quantity and price levels, while real GDP accounts for changes in quantity only. If nominal GDP increased by 4% and real GDP decreased by 1%, this implies that the price level (inflation) must have increased by approximately 5% to account for the difference.

Question 14

Assume that between 1998 and 2008, nominal GDP increased from $7 trillion to $12 trillion and that the price index rose from 100 to 133.3. Which of the following expresses GDP for 2008 in terms of 1998 prices?

Accepted Answer

To calculate GDP in terms of 1998 prices, we need to use the GDP deflator, which is the ratio of nominal GDP to real GDP (measured in constant 1998 dollars). Using the formula for the GDP deflator:
GDP deflator in 1998 = (Nominal GDP / Real GDP) x 100
100 = (7 trillion / Real GDP in 1998) x 100
Real GDP in 1998 = 7 trillion / 100 = $7 trillion

GDP deflator in 2008 = (12 trillion / Real GDP in 2008) x 100
133.3 = (12 trillion / Real GDP in 2008) x 100
Real GDP in 2008 = 12 trillion / (133.3/100) = $9 trillion

To express GDP in 2008 dollars in terms of 1998 prices, we need to adjust for changes in the price level by dividing nominal GDP (measured in current 2008 dollars) by the GDP deflator in 2008 (133.3) and multiplying by the GDP deflator in 1998 (100):
GDP in 1998 prices = (Nominal GDP / GDP deflator in 2008) x GDP deflator in 1998
GDP in 1998 prices = (12 trillion / 133.3) x 100 = $9 trillion, which is the same as real GDP in 2008.

Question 15

If nominal GDP increased 2 percent during a year, while real GDP increased 4 percent, the

Accepted Answer

Nominal GDP accounts for changes in price level and real GDP is adjusted for inflation. If real GDP increased more than nominal GDP, it indicates that the price level decreased.

Question 16

When adjusting nominal GDP for price changes, it is preferable to use the GDP deflator rather than the consumer price index because

Accepted Answer

The GDP deflator is better for adjusting nominal GDP for price changes because it specifically calculates changes in the prices of all goods and services produced in the economy, while the consumer price index only calculates changes in the prices of a specific basket of goods and services typically consumed by households. Therefore, the GDP deflator more closely approximates the items included in GDP.

Question 17

The typical bundle of goods and services on which the GDP deflator is based

Accepted Answer

The GDP deflator is based on a broad measure of goods and services produced domestically and is updated annually to reflect changes in the economy, unlike the CPI which is based on a fixed basket of goods and services.

Question 18

In contrast with nominal GDP, real GDP refers to nominal GDP

Accepted Answer

Real GDP takes into account changes in prices over time by using a price index (such as the Consumer Price Index or the GDP deflator) to adjust nominal GDP for inflation. This allows for a more accurate measure of economic growth, as it reflects changes in the quantity of goods and services produced rather than just changes in their prices.

Question 19

If the base year for the GDP deflator is 2005 and the value of the deflator during 2011 is 115, this indicates that the general level of prices

Accepted Answer

The GDP deflator measures the change in prices of all goods and services, and the base year is used as a benchmark to compare the changes in prices across different years. If the GDP deflator in 2011 is 115 with a base year of 2005, it means that the overall price level has increased by approximately 15% between 2005 and 2011. Therefore, the correct answer is C - the general level of prices was approximately 15 percent higher in 2011 than in 2005.

Question 20

If the GDP deflator in 2011 was 130 compared to a value of 100 during the 2005 base year, this would indicate that

Accepted Answer

The GDP deflator is a measure of the general level of prices in the economy, so a value of 130 compared to 100 in the base year indicates that prices were 30% higher in 2011 than in 2005. It does not necessarily indicate the inflation rate or growth in GDP.

Quiz 7: Taking the Nations Economic Pulse