AP_Krugman_Textbook

148 section 3 Measurement of Economic Performance

Tackle the Test: Multiple-Choice Questions

1. If the cost of a market basket of goods increases from $100 in
   year 1 to $108 in year 2, the consumer price index in year 2
   equals if year 1 is the base year.
   a. 8
   b. 10
   c. 100
   d. 108
   e. 110


2. If the consumer price index increases from 80 to 120 from one
   year to the next, the inflation rate over that time period was
   a. 20%
   b. 40%
   c. 50%
   d. 80%
   e. 120%


3. Which of the following is true of the CPI?
   I. It is the most common measure of the price level.
   II. It measures the price of a typical market basket of goods.
   III. It currently uses a base period of 1982–1984.

a. I only

b. II only

c. III only

d. I and II only

e. I, II, and III

4. The value of a price index in the base year is
   a. 0.
   b. 100.
   c. 200.
   d. the inflation rate.
   e. the average cost of a market basket of goods.


5. If your wage doubles at the same time as the consumer price
   index goes from 100 to 300, your real wage
   a. doubles.
   b. falls.
   c. increases.
   d. stays the same.
   e. cannot be determined.

Tackle the Test: Free-Response Questions

1. Suppose the year 2000 is the base year for a price index. Between
   2000 and 2020 prices double and at the same time your
   nominal income increases from $40,000 to $80,000.
   a. What is the value of the price index in 2000?
   b. What is the value of the price index in 2020?
   c. What is the percentage increase in your nominal income
   between 2000 and 2020?
   d. What has happened to your real income between 2000 and
   2020? Explain.

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.

2. The accompanying table contains the values of two price
   indexes for the years 2004, 2005, and 2006: the GDP deflator
   and the CPI. For each price index, calculate the inflation rate
   from 2004 to 2005 and from 2005 to 2006.

GDP

Year deflator CPI

2004 96.8 188.9

2005 100.0 195.3

2006 103.3 201.6

Summary

1.Economists keep track of the flows of money between

sectors with the national income and product ac-

counts,ornational accounts. Householdsearn in-

come via the factor marketsfrom wages, interest on

bonds,profit accruing to owners of stocks,and rent on

land. In addition, they receive government transfers.

Section 3 Review