Exercise Session #3

1.     Suppose that the CPI for a particular economy rose from 110 to 120 in year 1, 120 to 130 in
year 2, and 130

to 140 in year 3. We could conclude that this economy is experiencing:

A) accelerating inflation.

B) deflation.

C) disinflation.

D) a constant rate of inflation.


2. Disinflation occurs when:

A) the price level is falling.

C) a speculative investment "bubble" is bursting.

B) investment plans exceed saving.

D) the inflation rate is declining.


3. Your father graduated from school and took his first job in 1972, which paid a salary of $7,000.
What is this salary worth in 2005 dollars, given that CPI in 1972 = 41.8 and CPI in 2005 = 195?


4. Consider table below. Suppose in the basket there are 100 heads of cauliflower, 50 bunches of
broccoli, and 500 carrots.  calculate the inflation rate in year 2007.

Year

    Cauliflower

               Brocolli

                       Carrots

2006

    $2

               $1.5

                       $0.1

2007

    $3

               $1.5

                       $0.2


5. Which of the problems in the construction of the CPI might be illustrated by each of the
following situations? Explain.

a. the invention of the iPod

b. the introduction of air bags in cars

c. increased personal computer purchases in response to a decline in their price

d. more scoops of raisins in each package of Raisin Bran

e. greater use of fuel-efficient cars after gasoline prices increase


6. Which do you think has a greater effect on the consumer price index: a 10 percent increase in
the price of chicken or a 10 percent increase in the price of caviar? Why?


7. Suppose that people consume only three goods, as shown in this table:


             Tennis Balls

                         Golf Balls

                                   Gatorade bottles

2011 price

             $2

                         $4

                                   $1

2011 quantity

             100

                         100

                                   200

2012 price

             $2

                         $6

                                   $2

2012 quantity

             100

                         100

                                   200

i)                     What is the percentage change in the price of each of the three goods?

ii)                   Using a method similar to the consumer price index, compute the percentage
change in the overall price level.

iii)                 If you were to learn that a bottle of Gatorade increased in size from 2011 to
2012, should that information affect your calculation of the inflation rate? If so, how?

iv)                 If you were to learn that Gatorade introduced new flavors in 2012, should that
information affect your calculation of the inflation rate? If so, how?


8. The annual percentage rate of change in the price level is the:

A. relative price.

B. Price index

C. cost of living.

D. rate of inflation.

9. Suppose that society decided to reduce consumption and increase investment.

a. How would this change affect economic growth?

b. What groups in society would benefit from.


10. What is the opportunity cost of investing in capital? Do you think a country can “overinvest”
in capital? What is the opportunity cost of investing in human capital? Do you think a country can
“overinvest” in human capital? Explain.


11. From 1950 to 2000, manufacturing employment as a percentage of total employment in the U.S.
economy fell from 28 percent to 13 percent. At the same time, manufacturing output experienced
slightly more rapid growth than the overall economy.

a. What do these facts say about growth in labor productivity (defined as output per worker) in
manufacturing?

b. In your opinion, should policymakers be concerned about the decline in the share of
manufacturing employment? Explain.