Page 190 - Krugmans Economics for AP Text Book_Neat

Tackle the Test: Multiple-Choice Questions
1. If the cost of a market basket of goods increases from $100 in a. I only
year 1 to $108 in year 2, the consumer price index in year 2 b. II only
equals if year 1 is the base year. c. III only
a. 8 d. I and II only
b. 10 e. I, II, and III
c. 100
4. The value of a price index in the base year is
d. 108
a. 0.
e. 110
b. 100.
2. If the consumer price index increases from 80 to 120 from one c. 200.
year to the next, the inflation rate over that time period was d. the inflation rate.
a. 20% e. the average cost of a market basket of goods.
b. 40%
5. If your wage doubles at the same time as the consumer price
c. 50%
index goes from 100 to 300, your real wage
d. 80%
a. doubles.
e. 120%
b. falls.
3. Which of the following is true of the CPI? c. increases.
I. It is the most common measure of the price level. d. stays the same.
II. It measures the price of a typical market basket of goods. e. cannot be determined.
III. It currently uses a base period of 1982–1984.

Tackle the Test: Free-Response Questions

1. Suppose the year 2000 is the base year for a price index. Between 2. The accompanying table contains the values of two price
2000 and 2020 prices double and at the same time your indexes for the years 2004, 2005, and 2006: the GDP deflator
nominal income increases from $40,000 to $80,000. and the CPI. For each price index, calculate the inflation rate
a. What is the value of the price index in 2000? from 2004 to 2005 and from 2005 to 2006.
b. What is the value of the price index in 2020?
c. What is the percentage increase in your nominal income GDP
between 2000 and 2020? Year deflator CPI
d. What has happened to your real income between 2000 and
2004 96.8 188.9
2020? Explain.
2005 100.0 195.3
2006 103.3 201.6
Answer (5 points)
1 point: 100
1 point: 200
1 point: 100%
1 point: It stayed the same.
1 point: Real income is a measure of the purchasing power of my income, and
because my income and the price level both doubled, the purchasing power of
my income has not been affected: $40,000/100 = $80,000/200.

Section 3 Review

Summary

1. Economists keep track of the flows of money between come via the factor markets from wages, interest on
sectors with the national income and product ac- bonds, profit accruing to owners of stocks, and rent on
counts, or national accounts. Households earn in- land. In addition, they receive government transfers.
148 section 3 Measurement of Economic Performance