Question 1

Suppose the Social Security Administration would like to guarantee the purchasing power of social security payments to the elderly does not diminish. That is, the real value of the payments does not decrease. The CPI in 1990 was 130.7 and the CPI in 1998 was 163.0. How much does the Social Security Administration need to increase payments from 1990 to 1998 to accomplish this objective?

Accepted Answer

The answer of Suppose the Social Security Administration would like...

Question 2

Over the past year, price inflation has been 10%, but the price of a used Ford Escort has fallen from $6,000 to $5,000. The real price of a Ford Escort has fallen by:

Accepted Answer

The real price change accounts for inflation, so the adjusted initial price is $6,000 * 1.10 = $6,600. The price fell to $5,000, so the real price change is ($5,000 - $6,600) / $6,600 = -24%.

Question 3

Arbitraging price differences between two markets is generally not possible if:

Accepted Answer

Even if there are price differences between two markets, arbitrage is not possible if the transportation costs are higher than the price difference. Additionally, if the government has prohibited exchange between the two markets, arbitrage is not possible as well. Therefore, both options B and C need to be present for arbitrage to be not possible.

Question 4

Suppose the nominal price of gasoline was $0.90 per gallon in 1987. To convert this value to the real price of 1987 gasoline in 2017 dollars, we should:

Accepted Answer

To convert the nominal price of gasoline in 1987 to the real price of 1987 gasoline in 2017 dollars, we need to adjust for inflation. The best way to do this is to find the ratio of the 2017 CPI to the 1987 CPI, and multiply the nominal price by this ratio. This will give us the real price in 2017 dollars. Therefore, we should multiply the $0.90 nominal price of gasoline by the 2017 CPI (which is higher than the 1987 CPI) and divide by the 1987 CPI. This will tell us how much the nominal price of gasoline in 1987 would need to increase to be equivalent to the real price of gasoline in 2017 dollars.

Question 5

A key factor that determines the geographic extent of a housing market is the distance that commuters are willing to travel from home to work. Which of the following events would NOT help to expand the geographic extent of the housing market in a metropolitan area?

Accepted Answer

Increasing state gasoline tax would increase the price of gasoline and hence discourage people from traveling long distances for work. This would limit the expansion of the housing market in a metropolitan area. Therefore, this event would not help to expand the geographic extent of the housing market. A, C, and D would all help to expand the geographic extent of the housing market by making commuting more affordable and convenient.

Question 6

When 1983 is the CPI base year, the CPI value is 82.4 for 1980 and 172.2 for 2017. Suppose we want to convert this CPI series to have a base year of 2017 (that is, CPI₂₀₁₇ = 100). What is the value of the revised CPI for 1980?

Accepted Answer

To convert the CPI series to have a base year of 2017, we need to use the formula:
CPIS1U1B12017S1U1B0 = (CPIS1U1B1tS1U1B0 / CPIS1U1B1tS1U1B12017) × 100
where t is the year for which we want to calculate the new CPI. Substituting the given values, we get:
100 = (CPIS1U1B11980S1U1B0 / 172.2) × 100
Solving for CPIS1U1B11980S1U1B0, we get:
CPIS1U1B11980S1U1B0 = 47.9
Therefore, the value of the revised CPI for 1980 is 47.9.

Question 7

Suppose the price of crude oil is $95 per barrel in New York and $85 per barrel in Texas, and the transaction costs for trading between the two markets are $15 per barrel. What actions should you take to arbitrage this price difference?

Accepted Answer

The transaction cost of $15 per barrel exceeds the price difference of $10 per barrel between New York and Texas, making arbitrage unprofitable.

Question 8

Suppose the minimum wage was $0.25 per hour in 1938 and the CPI in that year was 11.5. If the CPI in 1990 was 130.7, what is the real value of the 1938 minimum wage in terms of 1990 dollars? The real value of the 1990 minimum wage in terms of 1990 dollars is $4.25. Has the real value of the minimum wage declined since 1938?

Accepted Answer

The answer of Suppose the minimum wage was $0.25 per...

Question 9

The nominal price of industrial red paint was $12 per gallon in 1993. To convert this value to the real price of paint in 2017 dollars, we should use the:

Accepted Answer

The Producer Price Index (PPI) is used to adjust prices of goods at the wholesale level, such as industrial paint, to account for inflation and convert nominal prices to real prices.

Question 10

Which price index published by the U.S. federal government represents retail price changes?

Accepted Answer

The Consumer Price Index (CPI) is the price index published by the U.S. federal government that represents retail price changes. It measures the average change over time in the prices paid by urban consumers for a basket of goods and services. The Producer Price Index (PPI) measures price changes from the perspective of the seller, while the GDP deflator measures price changes for all goods and services produced within an economy. The Dow-Jones Industrial Average is a stock market index that tracks the performance of 30 large publicly traded companies in the United States.

Question 11

Which of the following statement is FALSE?

Accepted Answer

Each statement provided is true within the context of economic theory, making the assertion that one of them is false incorrect.

Question 12

What does it mean when the CPI is higher this year than last?

Accepted Answer

When the Consumer Price Index (CPI) is higher this year compared to last, it indicates that there has been inflation since last year, meaning the general level of prices for goods and services has risen.

Question 13

Which price index published by the U.S. federal government represents wholesale price changes?

Accepted Answer

The Producer Price Index (PPI) is published by the U.S. federal government and measures changes in wholesale prices. The Consumer Price Index (CPI) measures changes in retail prices and is therefore not the best choice for this question. The GDP deflator is a measure of overall inflation in an economy and includes both wholesale and retail prices. The Dow-Jones Industrial Average is an index of stock prices and is not related to price changes in goods and services.

Question 14

To arbitrage a price difference between two markets, you should:

Accepted Answer

This is known as a "buy low, sell high" strategy and is the most common type of arbitrage. By buying in the lower-priced market and then immediately selling in the higher-priced market, you can capture a profit equal to the difference in prices. Selling in the low-price market and buying in the high-price market would result in a loss, and selling in both markets would not allow you to profit from the price difference.

Question 15

Use the following statements to answer this question: I. The inflation rate (the rate of change in the general price level) calculated from a price index like CPI is the same regardless of the base year we use to form the price index.
II) Although the CPI may indicate the general price level increased by 5% last year, there are some consumer products that may have experienced more or less inflation in the past year.

Accepted Answer

I is true because the inflation rate is a measure of the percentage change in the price level over time, and this percentage change is independent of the base year used to calculate the price index. II is also true because the CPI is a measure of the average change in prices for a basket of goods and services, and it is possible for some individual items in the basket to experience more or less inflation than the average.

Question 16

The price of a taco was $0.29 in 1970 and $1.09 in 2017. The CPI was 38.8 in 1970 and 172.2 in 2017. The 2017 price of a taco in 1970 dollars is:

Accepted Answer

The answer of The price of a taco was $0.29...

Question 17

Which of the following goods is NOT a likely component of the Consumer Price Index?

Accepted Answer

The Consumer Price Index measures changes in the prices of goods and services purchased by households, so it is unlikely to include structural steel beams, which are primarily used in construction and not purchased by households as a consumer good. The other options, hamburger, 87 octane gasoline, and movie tickets, are all goods that are commonly purchased by households and would likely be components of the Consumer Price Index.

Question 18

From Example 1.2 in the textbook, Pindyck and Rubinfeld distinguish between the mass market and dealer market for bicycles. Although there are many dealers in the U.S. and only a few mass merchandisers, we should expect the dealer market to be somewhat less competitive than the mass market. Why?

Accepted Answer

A) Dealer bicycles often differ significantly in quality and performance, making them less directly comparable and substitutable. B) The dealer market is usually localized, limiting the number of competitors within a given area. These factors contribute to a less competitive environment compared to the mass market, where products are more standardized and the market is broader.

Question 19

Since last year, the price of gold has risen from $1100 to $1420. What annual inflation rate would leave the real price of gold unchanged over the last twelve months?

Accepted Answer

To find the real price of gold, we need to adjust for inflation. We can use the formula: Real Price = Nominal Price / (1 + Inflation Rate). We want to find the inflation rate that would make the real price of gold today the same as it was a year ago, when the nominal price was $1100. Plugging in the numbers, we get:

1420 = 1100 / (1 + Inflation Rate)

Solving for Inflation Rate, we get:

Inflation Rate = (1420 / 1100) - 1 = 0.2909 or 29.09%

Therefore, the correct answer is A) Approximately 29%.

Question 20

The "constant dollar" price is:

Accepted Answer

The "constant dollar" price refers to the value of a good or service adjusted for inflation, allowing for the comparison of purchasing power over time. This concept encompasses the real price of a good (A), the nominal price adjusted for inflation (B), and the "current dollar" price adjusted for inflation (C), making all of the provided options correct descriptions of the "constant dollar" price.

Quiz 1: Preliminaries

Over the past year, price inflation has been 10%, but the price of a used Ford Escort has fallen from $6,000 to $5,000. The real price of a Ford Escort has fallen by:

Arbitraging price differences between two markets is generally not possible if:

Suppose the nominal price of gasoline was $0.90 per gallon in 1987. To convert this value to the real price of 1987 gasoline in 2017 dollars, we should:

A key factor that determines the geographic extent of a housing market is the distance that commuters are willing to travel from home to work. Which of the following events would NOT help to expand the geographic extent of the housing market in a metropolitan area?

When 1983 is the CPI base year, the CPI value is 82.4 for 1980 and 172.2 for 2017. Suppose we want to convert this CPI series to have a base year of 2017 (that is, CPI₂₀₁₇ = 100) . What is the value of the revised CPI for 1980?

Suppose the price of crude oil is $95 per barrel in New York and $85 per barrel in Texas, and the transaction costs for trading between the two markets are $15 per barrel. What actions should you take to arbitrage this price difference?

The nominal price of industrial red paint was $12 per gallon in 1993. To convert this value to the real price of paint in 2017 dollars, we should use the:

Which price index published by the U.S. federal government represents retail price changes?

Which of the following statement is FALSE?

What does it mean when the CPI is higher this year than last?

Which price index published by the U.S. federal government represents wholesale price changes?

To arbitrage a price difference between two markets, you should:

The price of a taco was $0.29 in 1970 and $1.09 in 2017. The CPI was 38.8 in 1970 and 172.2 in 2017. The 2017 price of a taco in 1970 dollars is:

Which of the following goods is NOT a likely component of the Consumer Price Index?

From Example 1.2 in the textbook, Pindyck and Rubinfeld distinguish between the mass market and dealer market for bicycles. Although there are many dealers in the U.S. and only a few mass merchandisers, we should expect the dealer market to be somewhat less competitive than the mass market. Why?

Since last year, the price of gold has risen from $1100 to $1420. What annual inflation rate would leave the real price of gold unchanged over the last twelve months?

The "constant dollar" price is:

Quiz 1: Preliminaries

Over the past year, price inflation has been 10%, but the price of a used Ford Escort has fallen from $6,000 to $5,000. The real price of a Ford Escort has fallen by:

Arbitraging price differences between two markets is generally not possible if:

Suppose the nominal price of gasoline was $0.90 per gallon in 1987. To convert this value to the real price of 1987 gasoline in 2017 dollars, we should:

A key factor that determines the geographic extent of a housing market is the distance that commuters are willing to travel from home to work. Which of the following events would NOT help to expand the geographic extent of the housing market in a metropolitan area?

When 1983 is the CPI base year, the CPI value is 82.4 for 1980 and 172.2 for 2017. Suppose we want to convert this CPI series to have a base year of 2017 (that is, CPI2017 = 100) . What is the value of the revised CPI for 1980?

Suppose the price of crude oil is $95 per barrel in New York and $85 per barrel in Texas, and the transaction costs for trading between the two markets are $15 per barrel. What actions should you take to arbitrage this price difference?

The nominal price of industrial red paint was $12 per gallon in 1993. To convert this value to the real price of paint in 2017 dollars, we should use the:

Which price index published by the U.S. federal government represents retail price changes?

Which of the following statement is FALSE?

What does it mean when the CPI is higher this year than last?

Which price index published by the U.S. federal government represents wholesale price changes?

To arbitrage a price difference between two markets, you should:

The price of a taco was $0.29 in 1970 and $1.09 in 2017. The CPI was 38.8 in 1970 and 172.2 in 2017. The 2017 price of a taco in 1970 dollars is:

Which of the following goods is NOT a likely component of the Consumer Price Index?

From Example 1.2 in the textbook, Pindyck and Rubinfeld distinguish between the mass market and dealer market for bicycles. Although there are many dealers in the U.S. and only a few mass merchandisers, we should expect the dealer market to be somewhat less competitive than the mass market. Why?

Since last year, the price of gold has risen from $1100 to $1420. What annual inflation rate would leave the real price of gold unchanged over the last twelve months?

The "constant dollar" price is:

When 1983 is the CPI base year, the CPI value is 82.4 for 1980 and 172.2 for 2017. Suppose we want to convert this CPI series to have a base year of 2017 (that is, CPI₂₀₁₇ = 100) . What is the value of the revised CPI for 1980?