CPI, Inflation, Productivity and Economic Growth – Review Flashcards

Forty question-and-answer flashcards covering CPI calculation, inflation, real versus nominal values, interest rates, productivity, economic growth, convergence, saving, and investment concepts.

What can economists use to measure the cost of living?

• price elasticity of demand
• gross domestic product
• monetary policy
• consumer price index

The Consumer Price Index (CPI).

After fixing the basket and finding the prices, what is the next step when calculating CPI?

• calculate the basket's cost
• calculate the index
• calculate the inflation rate
• choose a base year

Calculate the basket’s total cost.

When the quality of a good changes from one year to the next while its price remains the same, this creates a problem with the CPI. Even though the BLS tries to account for changes in quality, why does it still create a problem?

• New goods are constantly being introduced.
• None of the above.
• Quantity is hard to measure.
• Quality is hard to measure.

Because the quality of goods is hard to measure precisely.

In 2000 the CPI was 210. In 2001 the CPI was 215. What was the inflation rate?

• 0.98%
• 2.38%
• 5%
• 1.02%

About 2.38%.

When you want to know how fast the purchasing power of your bank account rises over time, you would look at the

• nominal rate of three-month Treasury bills.
• real interest rate.
• nominal interest rate.
• inflation rate.

The real interest rate.

When dollar amounts are indexed for inflation, they are

• automatically adjusted for inflation.
• never adjusted for inflation.
• fixed using the nominal rates.
• automatically adjusted using the nominal rates.

They are automatically adjusted for inflation.

If the CPI rises, there was

• deflation.
• inflation.
• the price level has fallen.
• There is no relationship between the CPI and inflation.

It indicates that inflation has occurred (prices have risen).

When comparing the salary of someone from 1970 to someone in 2020, you need to

• adjust one of the salaries using real GDP before you can compare.
• it's easy to make a direct comparison. Just compare the two numbers.
• None of the above.
• you need to adjust one of the salaries using a price index before you can compare.

Adjust at least one salary using a price index before comparing.

If the CPI was 20 in 1920 and is 220 today, then how much money would you need today in order to buy what you could buy in 1920 for $100?

• $100 * 20
• $100 * 220
• $100 * (220/20)
• $100 * (20/220)

$1,100.

What is one of the differences between the CPI and the GDP deflator?

• The CPI reflects the prices of goods and services produced in foreign countries. The GDP deflator reflects the prices of goods and services produced domestically.
• The CPI reflects the prices of goods and services produced domestically. The GDP deflator reflects the prices of goods and services bought by consumers.
• The CPI reflects the prices of goods and services bought by consumers. The GDP deflator reflects the prices of goods and services produced domestically.
• The CPI reflects the prices of a fixed basket of goods and services. The GDP deflator reflects the prices of goods and services bought by consumers.

The CPI measures prices of consumer purchases (including imports), whereas the GDP deflator measures prices of goods and services produced domestically.

Countries with lower income per person compared to the US will

• always have growth rates lower than the US.
• always have growth rates higher than the US.
• may or may not have growth rates lower than the US.
• will always rise to the same growth rate as the US.

No; they may or may not have lower growth rates.

Productivity is

• the amount of goods and services produced for each hour of a worker’s time.
• not dependent on physical capital.
• not related to living standards.
• All are correct

The amount of goods and services produced per hour of a worker’s time.

What determines your standard of living?

• age
• None are correct
• location
• productivity

Its productivity.

All of the following are determinants of productivity except

• labor
• physical capital
• natural resources
• technological knowledge

Labor.

Investing in capital will make society

• consume more and save less.
• consume less and save more.
• consume and save less.
• consume and save more.

Consumption falls and saving rises.

Capital is subject to

• constant returns.
• None are correct
• diminishing returns.
• increasing returns.

Diminishing returns.

The implications of diminishing returns to capital lead to the

• catch-up effect.
• wealth effect.
• spillover effect.
• problem of property rights.

The catch-up (convergence) effect.

When an American purchases stocks of foreign-based companies, this is known as

• foreign indirect investment
• foreign direct investment
• domestic portfolio investment
• foreign portfolio investment

Foreign portfolio investment.

Especially in less developed countries, what is the opportunity cost of going to school?

• The forgone enjoyment from sleeping.
• There is no opportunity cost.
• The forgone wages from working.
• The forgone happiness of watching movies on a streaming service.

The forgone wages from working.

Governmental policy has encouraged research by

• All are correct
• sponsoring research.
• giving tax breaks to firms engaging in research and development.
• patents.

Through direct sponsorship, tax breaks, and patent protection— all of the above.

Suppose in the market for tennis shoes, the demand curve increased which resulted in a higher equilibrium price. In the market for bicycles, suppose the supply curve increased which resulted in a lower equilibrium price. This indicated

• None of the above
• both inflation in the market for tennis shoes and deflation in the market for bicycles
• deflation in the market for bicycles
• inflation in the market for tennis shoes

Inflation in the tennis-shoe market and deflation in the bicycle market.

Suppose the CPI in 1998 was 150. In 2008 the CPI was 190. How much is $100 in 1998 worth in 2008 dollars?

• None of the above
• $78.95
• $118.33
• $126.67
• $140

Approximately $126.67.

Suppose the CPI in 2001 was 250. In 2020, the CPI was 300. How much money would you need in 2001 in order to buy what you could buy in 2020 for $60?

• $300
• $72
• $45
• $30
• None of the above

$50 (i.e., $60 × 250 ÷ 300).

A country’s CPI in 2009 was 160. In 2010, their CPI was 200. What was the inflation rate? (Enter the percent value, but you do not need to enter the %. Round to the nearest whole number. For example, if it is 11.23%, please enter 11)

• 0.25 (with margin: 0)
• 25 (with margin: 0)

25%.

Due to problems with the CPI measuring cost of living, it tends to

• overstate the fall in a customer’s true cost of living
• overstate the rise in a customer’s true cost of living
• underestimate the fall in a customer’s true cost of living
• underestimate the rise in a customer's true cost of living

It tends to overstate the rise in the true cost of living.

Suppose laptops were further improved making them even lighter and faster; however, they were also more expensive. In the beginning, the CPI will

• count the entire resulting higher price as inflation
• not be affected by the higher priced laptops
• count the higher price as a result of the improved quality
• None of the above

The entire price increase is counted as inflation.

Suppose the price of imported Samsung refrigerators increased. This price increase would be reflected in

• only the CPI
• only the GDP deflator
• neither the CPI nor the GDP deflator
• both the CPI and GDP deflator

Only in the CPI.

The basket of goods that the CPI uses

• None of the above
• is fixed
• varies each time it is calculated
• are only produced within the US
• are bought by everyone (government, firms, and consumers) within the US

It is fixed.

The bank lent you money with 20% interest. Prices are expected to increase by 5%. Which statement is true?

• The nominal interest rate is 15% and the real interest rate is 20%.
• The nominal interest rate is 20% and the real interest rate is 15%.
• The nominal interest rate is 20% and the real interest rate is 25%.
• The nominal interest rate is 25% and the real interest rate is 20%.

Nominal rate = 20%; real rate = 15%.

Generally during recessions, inflation is

• high
• low
• there is deflation
• inflation is negative

Inflation is low (and can even turn negative).

According to the theory of convergence, low-income countries

• can grow faster than high-income countries only when high-income countries don’t enact policies to raise their GDP
• can never grow faster than high-income countries even when both countries enact policies to raise their GDP
• can grow faster than high-income countries even when both countries enact policies to raise their GDP
• will grow slower than high-income countries even when high-income countries do not enact policies to raise their GDP

Yes, low-income countries can grow faster.

Suppose you have 5 employees: Alvin, Brittney, Charles, Devin and Earl. Alvin can make 20 necklaces in two hours. Brittney can make 30 necklaces in five hours. Charles can make 15 necklaces in three hours. Devin can make 24 necklaces in two hours. Earl can make 40 necklaces in five hours. Which employee has the greatest productivity?

• Earl
• Charles
• Brittney
• Devin
• Alvin

Devin.

Small differences in annual growth rates

• continue to be small differences over time
• become even smaller differences over time
• don’t make much difference over time
• become large differences over time

They become large differences over time.

Suppose the current income of a nation is $1 million and they are consuming 70% and saving 30% of that income. If that nation wants to invest more in capital to grow, they should

• None of the above
• consume less than 70% of their income
• consume more than 70% of their income
• save less than 30% of their income

Consume less than 70% (i.e., save more).

Leo can decorate 12 cakes in two hours. Don can decorate 20 cakes in four hours. Which of the following is correct?

• Leo has a higher productivity than Don, but we can’t determine who has a higher standard of living.
• Leo has a smaller productivity than Don, but we can’t determine who has a higher standard of living.
• None of the above
• Leo has a higher productivity than Don, but Leo’s standard of living is smaller than Don’s.
• Leo has a smaller productivity than Don, but Leo’s standard of living is higher than Don’s.

Leo is more productive, but we cannot determine who has the higher standard of living.

A student says that to increase productivity, a nation can only use physical capital, human capital, and natural resources. Which of the statements is true?

• The student is incorrect because a nation can only change physical capital and human capital to increase productivity.
• The student is correct.
• The student is incorrect because productivity can also be increased though technology.
• The student is incorrect because productivity can also be increased through the skills that make workers productive.

Because technological progress also raises productivity.

How can we measure productivity?

• the amount of goods produced per hour of work
• the ratio of saving to investment
• both the ratio of saving to investment AND real GDP per capita
• both the amount of goods produced per hour of work AND real GDP per capita
• real GDP per capita

Output per hour of work and real GDP per capita.

A nation decides to increase the percentage of GDP devoted to saving. In the long run with diminishing returns to capital, this will lead to

• higher growth in GDP
• higher levels of GDP
• higher growth in productivity
• All of the above

Higher levels of GDP (but not permanently higher growth rates).

Countries that have many revolutions or coups typically have

• All of the other answers are correct
• low economic growth
• low income
• low productivity

Low productivity, low income, and low economic growth (all of the above).

Suppose a French-owned company opens a store in Canada. This will

• increase investment in Canada and is known as foreign direct investment
• increase saving in France and is

It increases investment in Canada and is called foreign direct investment.