ECON 203 Test 2 TAMU question with correct answers

CPI Definition CORRECT ANSWER The average level of prices of goods typically bought by households. Inflation Rate Definition CORRECT ANSWER The percentage increase in the general price level. CPI Formula CORRECT ANSWER Cost of basket year 1/Cost of basket base year X 100 Inflation Rate Formula CORRECT ANSWER (Year 2 CPI - Year 1 CPI)/Year 1 CPI X 100 Problems with using the CPI to track changes in cost of living CORRECT ANSWER 1. Substitution bias 2. Quality Bias 3. New Products Bias 4. Outlet substitution bias Comparing prices from different years formula CORRECT ANSWER Year A price X (Year B CPI/ Year A CPI) Real Interest Rate CORRECT ANSWER Nominal Interest Rate - Inflation Rate Real GDP Formula CORRECT ANSWER # labor hours worked X (Real GDP/# labor hours worked)