Macroeconomic Policy Basics

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Questions and Answers

What is the first goal of macroeconomic policy?

  • Price stability
  • Full employment
  • Economic growth (correct)
  • Stable inflation

A little inflation is considered a bad thing by economists.

False (B)

What does unanticipated inflation typically affect?

It affects various people and firms differently based on their financial situation.

The formula for calculating the rate of inflation is: Rate of inflation = ______.

<p>Difference in price levels / Original price level x 100</p>
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Match the following groups with their outcomes during unanticipated inflation:

<p>Lenders at fixed interest rates = Lose Borrowers at fixed interest rates = Win People on fixed incomes = Lose Real estate owners = Win</p>
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What was the annual rate of inflation in the U.S. in August 2022?

<p>8.3% (C)</p>
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What is a market basket?

<p>A hypothetical set of consumer purchases used to calculate a price index.</p>
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Hyperinflation refers to a very high and typically accelerating rate of inflation.

<p>True (A)</p>
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What is the purpose of using the Consumer Price Index (CPI) in price calculations?

<p>To convert nominal prices into real prices (C)</p>
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Real prices always reflect the value of money in terms of the base year.

<p>True (A)</p>
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How would you calculate the real price of a movie ticket from 1972 in 2016 dollars?

<p>Multiply the nominal price by the CPI of the base year and divide by the CPI of the year in question.</p>
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In order to find out how much $250,000 in 2019 would be worth in 2022, one must use the ______.

<p>CPI</p>
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Match the following nominal prices with their respective years:

<p>$1.75 = 1972 $2.45 = 1982 $63 = 1998 $127 = 2022</p>
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Which of the following statements about nominal and real prices is correct?

<p>Real prices are adjusted for changes in purchasing power. (D)</p>
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If you earned $10 an hour in 1994, what additional amount would you need to earn in 1995 to maintain the same purchasing power?

<p>It depends on the inflation rate between 1994 and 1995.</p>
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The CPI can be used to compare the purchasing power of money across different years.

<p>True (A)</p>
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What does a price index measure?

<p>The price level of goods (C)</p>
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The Consumer Price Index (CPI) reflects the average cost of a market basket of goods in the U.S.

<p>True (A)</p>
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What was the average cost of a new car in 2016?

<p>33,560</p>
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To calculate the price index, you divide the ______ cost by the base-year cost.

<p>given-year</p>
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Match the item to its associated cost in the base year:

<p>Quesadilla = $5.00 Floppy disks = $6.00 Christmas ornament = $1.50</p>
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What is the total spending for the market basket in the base year?

<p>$480.00 (B)</p>
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In 2016, the average cost of a new car decreased compared to 1950.

<p>False (B)</p>
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What does CPI stand for?

<p>Consumer Price Index</p>
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Flashcards

Inflation

An increase in the overall price level of goods and services in an economy.

Aggregate Price Level

A measure of the overall level of prices in the economy.

Inflation Rate

The percentage change in the aggregate price level over a period of time.

Market Basket

A hypothetical set of consumer purchases of goods and services used to calculate a price index.

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Macroeconomic Policy Goals

The main aims of policies to manage an economy: economic growth, full employment, price stability.

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Price Stability

Keeping prices from increasing or decreasing too much, avoiding inflation or deflation.

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Hyperinflation

A very rapid, uncontrolled increase in the price level.

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Anticipated inflation

Inflation that people expect. Decisions are made with anticipated level.

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Price Index

A measure of the overall price level of goods and services in an economy.

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CPI (Consumer Price Index)

A significant measure of the U.S. price level, using a large collection of goods and services.

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Base-Year Cost

The total cost of a market basket of goods and services in a specific year used as a reference point.

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Given-Year Cost

The total cost of a market basket of goods and services in a specific given year.

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Price Index Calculation

Calculated by dividing the given-year cost by the base-year cost, then multiplying by 100.

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Price Level Change

A variation in the amount of money required to purchase a basket of goods and services.

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Nominal Price

The actual dollar amount paid for a good or service at a specific point in time. It represents the price without adjustments for inflation.

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Real Price

The price of a good or service adjusted for inflation. It reflects the purchasing power of the price, comparing it to a base year's value.

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Real Price Calculation

To calculate the real price of a good in terms of a base year, divide the nominal price by the price index of the given year and multiply by the price index of the base year.

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Base Year

The year used as a reference point when calculating real prices. The real price in the base year is equal to the nominal price.

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Comparing Prices Across Time

When comparing prices across different years, it's essential to consider the effects of inflation by converting nominal prices into real prices.

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Inflation's Impact

Inflation reduces the purchasing power of money over time. What you could buy with $1 today might be worth less in the future.

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Real Wage

The purchasing power of a wage, adjusted for inflation. Shows how much goods and services can be purchased with the wage.

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