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QCC – Fall, 2023
ECON 215 – Macroeconomics
Prof. Ken Friedman
[email protected]
Midterm Exam #2 – Chapter 7 – The CPI and Consumer Price Inflation
(1) In the year 2019, the total cost of the “market basket” used to calculate the CPI
was $64,280. In 2021, the cost of the market basket increased to $70,708. If the
CPI averaged 260 for the year 2019, what would be true for its value in 2021?
(a) 236
(b) 260
(c) 275
(d) 286
For the next set of questions, consider the following long-term price trends
between 1995 and 2020:
Housing
Transportation
Medical Care
Education
+100%
+90%
+80%
+75%
CPI-Overall
Food/Beverage
Recreation
Apparel/Clothing
+ 60%
+45%
+40%
+30%
(2) Consider upper class families that direct a strong majority – fully 80% – of
household spending to housing, transportation, medical care and education
(with deluxe homes, costly cosmetic procedures, “fancy” cars and private schools).
If their household incomes only rose at the same 60% pace as general inflation
then which statement is most reasonable. Their standard of living may:
(a) be worse than it appears and in fact may have declined
(b) be better than it appears and in fact likely increased
(3) Now consider middle and lower class families that direct fully 80% of household
spending to food/beverages, apparel/clothing and recreation. (with modest
homes, basic health care and public schools). If their household incomes rose at
the same 60% pace as general inflation then which statement is most reasonable.
Their standard of living may:
(a) be worse than it appears and in fact may have declined
(b) be better than it appears and in fact likely increased
(4) Which statement best describes the inflation experience for the U.S. economy
for the years from 2008 until 2020?
(a) there has been price deflation (-2%) from 2008 to 2020 – with lower prices
(b) price inflation has been high – more than 5% per year for most years
(c) price inflation has been low and stable at 1% to 2% per year overall
(5) How serious a threat could price inflation become within the U.S. economy?
Which statement best reflects the historical price inflation record that those
concerned with current trends are citing most?
(a) From the late 1970’s to the early 1980’s, price inflation averaged 12% per
year. This implies that price inflation could always become serious.
(b) Price inflation has been less than 2% per year before Covid19 and is therefore a
minor concern in reality.
(6) Does price inflation as measured by the consumer price index (CPI) influence
public sector spending by federal and state government?
(a) No, as the President and the Congress can do anything they want at any time.
Price inflation as measured by the CPI is for advisory purposes only.
(b) Yes, as existing laws mandate cost of living adjustments for both government
employee wages, federal and military retirement pay and social welfare
transfer payments
For the next four questions, consider each statement and determine whether
it can be classified as a harmful effect from price inflation or a beneficial effect
for many persons and their households, or perhaps of no material impact:
(Q#7a) Price inflation leads to a separation of real and nominal values thus creating
a risk of “money illusion”:
(a) harmful
(b) beneficial
(Q#7b) Price inflation erodes the purchasing power for household income,
reducing the items that households can buy:
(a) harmful
(b) beneficial
(Q#7c) Price inflation erodes/reduces the burden of fixed payment loan debt for
houses, cars and education:
(a) harmful
(b) beneficial
(Q#7d) Price inflation often supports rising household compensation levels through
time with cost of living adjustments for it:
(a) harmful
(b) beneficial
(c) no impact
(Q#8) Between 1980 and 2020, entry level unskilled workers experienced an increase
in their average wage from $6 per hour to $13.25 per hour – exactly 2% per year
with annual compounding. At the same time, the CPI rose from 82 to 260, an
increase averaging nearly 3% per year. Which statement best summarizes the
long run outcome for this class of labor. These workers are:
(a) clearly better off as their wage has more than doubled during this interval of time
(b) are neither better off nor worse off with constant “real wages”
(c) clearly worse off as their “real wage” deteriorated substantially
(Q#9) In terms of the commodity substitution bias, the CPI overstates inflation
because the calculation ignores that many consumers eventually buy:
(a) more of those goods whose (relative) price has fallen.
(b) more of those goods whose (relative) price has risen
(Q#10) If households starting buying better quality fresh produce for lower prices
at farmer’s markets rather than at fancy grocery stores like Wholefoods
then the CPI calculation that failed to account for this would:
(a) Understate the true amount of price inflation – the increase in the cost of living
(b) Overstate the true amount of price inflation – the increase in the cost of living
(Q#11) Suppose the BLS uses the price of new college textbooks when calculating
the consumer price index. During the past five years, the trend has been for
students to buy used textbooks at much lower prices or renting online again for a
much lower price (or even not buying their textbooks at all! The impact of this
Commodity Substitution bias means that if this buying trend is ignored by the BLS
when calculating the CPI then:
(a) price inflation will be overstated and its true value would be lower than
reported
(b) price inflation will be understated and its true value would be higher than
reported
(Q#12) If the CPI is indeed a biased measure of the inflation rate and overstates the
true rate of increase in price inflation – implying a greater increase in the
cost of living – then government outlays or spending for Social Security,
government pensions, food stamps and welfare payments will:
(a) increase at a faster rate than the actual inflation rate and faster than is needed
to maintain an economic standard of living for beneficiaries
(b) increase at a slower rate than the actual inflation rate and slower than is needed
to maintain an economic standard of living for beneficiaries
(Q#13) A change in the real wage rate measures the change in the
(a) actual dollar wage of an hour’s work – a nominal value
(b) quantity and quality of goods and services that an hour’s work can buy
– the purchasing power of earned money
(Q#14) If you get an 8 percent increase in your actual ($) nominal income – from
$25,000 per year to $27,000 per year – then your real income increases
only if the inflation rate for the items that you want to buy increases by:
(a) more than 8 percent
(b) exactly 8 percent
(c) less than 8 percent
{Q#15) Consider price deflation. Your actual ($) nominal income now goes down
from $30,000 per year to $28,500 – a reduction of $1,500 or 5%. However,
the $ cost of the goods and service you purchase has also dropped: from
$25,000 to $23,000 – a decline of $2,000 or 8% deflation.
Your “real income” has now:
(a) gone up
(b) gone down
(c) stayed the same
QCC – Fall, 2023
Prof. Ken Friedman
ECON 215 – Macroeconomics
[email protected]
Midterm Exam #2 – Chapter 7 – Numerical Analysis
Real vs. Actual Prices and Wages
Product Prices – Laptop Computers
Consider a ten year time interval and note the following values for the CPI and
for the price of a Laptop Computer:
Consumer Price Index in 2008 = 220
Consumer Price Index in 2018 = 253
The price for a Laptop Computer in 2008 = $560
The price for a Laptop Computer in 2018 = $700
(Q#1) What is the percent increase in the price of Laptop Computers?
(a) 15%
(b) 20%
(c) 25%
(d) 30%
(Q#2) What is the percent increase in the Consumer Price Index?
(a) 15%
(b) 20%
(c) 25%
(d) 30%
(Q#3) What happened to the “real” price of the Laptop Computer between
2008 and 2018?
(a) % change in actual price = % rate of general price inflation – no change
(b) % change in actual price > % rate of general price inflation – went up
(c) % change in actual price < % rate of general price inflation - went down
Wages – Data Science Analysts
As before, the data for the CPI will be:
Consumer Price Index in 2008 = 220
Consumer Price Index in 2018 = 253
A Data Science Analyst earned $32 per hour in 2008
A Data Science Analyst earned $48 per hour in 2018
(Q#4) What is the percent increase in the wage for Data Science Analysts?
(a) 15%
(b) 25%
(c) 40%
(d) 50%
(Q#5) What is the percent increase in the Consumer Price Index? – same as Q#2
(a) 15%
(b) 20%
(c) 25%
(d) 30%
(Q#6) What happened to the “real” wage for Data Science Analysts between
2008 and 2018?
(a) % change in actual wage = % rate of general price inflation - no change
(b) % change in actual wage > % rate of general price inflation – went up
(c) % change in actual wage < % rate of general price inflation - went down
(Q#7) What simulated price for the laptop computer in year 2018 would equal
the same purchasing power as the price of $560 did in year 2008?
(a) $608.70
(b) $622
(c) $632.50
(d) $644
(Q#8) What simulated price for the laptop computer in year 2008 would equal
the same purchasing power as the price of $700 did in year 2018?
(a) $608.70
(b) $622
(c) $632.50
(d) $644
(Q#9) What simulated value for the Data Analysts’ wage in year 2018 would
equal the same purchasing power as the wage of $32 did in year 2008?
(a) $32.00
(b) $36.80
(c) $41.74
(d) $46.40
(Q#10) What simulated value for the Data Analysts’ wage in year 2008 would
equal the same purchasing power as the price of $48 did in year 2018?
(a) $32.00
(b) $36.80
(c) $41.74
(d) $46.40
Real vs. Nominal – Interest Rates and Wage Growth
We have the following economic and financial data:
W0 = $100,000 = Bank Account or Bond Investment Fund
i = 10% ( =.10 ) = Interest rate – the Investment Rate of Return
p = 4% ( = .04 ) = Rate of Price Inflation
The consumer can purchase $100,000 worth of products at time 0 using this wealth.
As an alternative, the consumer can invest this wealth for one year and then use
the W1 wealth value to purchase the same set of consumer products but at higher
prices due to price inflation. First, fill in the time line diagram below and then
use these results to answer the questions.
W0 = $100,000
W1 = $__________
= $100,000 + $_______
|----------------------------------------------------------------|
C0 = $100,000
C1 = $__________
= $100,000 + $_______
W0 – C0 = $0
W1 – C1 = $_______
(Q#1) What is the actual cash value of the interest received by the account holder
or investor after investing: W0 = $100,000 at: i = 10%
(a) $4,000
(b) $6,000
(c) $8,000
(d) $10,000
(Q#2) What is the wealth amount at the end of the investment year, W1 = ?
(a) $100,000
(c) $106,000
(e) $110,000
(b) $104,000
(d) $108,000
(Q#3) What is the inflation growth rate factor, (1 + p) ?
(a) 1.00
(b) 1.02
(c) 1.04
(d) 1.06
(e) 1.10
(Q#4) The Consumer(C) spending value will evolve to, C1 = :
(a) $100,000
(c) $106,000
(b) $104,000
(d) $110,000
(Q#5) The true net reward to the investor-spender from this combined plan to save,
invest and then spend will be: W1 – C1 = ?
(a) $4,000
(b) $6,000
(c) $8,000
(d) $10,000
(Q#6) The structure of the real return in $’s will be:
(a) $6,000 = $10,000 – $4,000
(b) $10,000 = $4,000 + $6,000
(c) $4,000
= $10,000 – $6,000
(d) $0 = $10,000 - $6,000 – $4,000
(Q#7) The structure of the real return in %-rate’s will be:
(a) 10% = 6% + 4%
(c) 6% = 10% – 4%
(b) 4% = 10% – 6%
(d) 0% = 10% – 4% – 6%
Nominal and Real Rates of Interest
(Q#8) Let the: Real Rate = 5.75% ; Inflation Rate = 2.25% :
What is the Nominal Rate ?
(a) 3.5%
(b) 5.75%
(c) 8%
(d) 9%
(Q#9) If the: Nominal Rate = 6.25% and the: Real Rate = 2.75% :
What is the Inflation Rate ?
(a) 3.5%
(b) 5.75%
(c) 8%
(d) 9%
Nominal and Real Rates for Wage Increases
(Q#10) Let the: Nominal Growth Rate for Wages = 4% per year
Rate of Price Inflation = 2.5% per year
What is the: Real Growth Rate for Wages?
(a) 0%
(b) 1.5%
(c) 2.5%
(d) 6.5%
(Q#11) Let the: Real Growth Rate for Wages = 6.5% per year
Rate of Price Inflation = 2.25% per year ;
What is the: Actual/Nominal Wage Growth Rate?
(a) 0%
(b) 4.25%
(c) 6.5%
(d) 8.75%
(Q#12) Let the: Nominal Growth Rate for Wages = 7.5% per year
Real Growth Rate for Wages = 1.5% per year ;
What is the: Rate of Price Inflation?
(a) 6%
(b) 7.5%
(c) 9%
QCC – Fall, 2023
Prof. Ken Friedman
Econ 215 – Macroeconomics
[email protected]
Chapter Eight – Potential GDP – Natural Unemployment
[Q#1] Consider the following wage and price data:
Wactual = $40 per hour
PGas = $2 per gallon
What best represents the “real” wage for this worker-consumer?
(a) $2 per gallon
(b) $40 per hour of labor
(c) 20 gallons of gas per hour of labor
Consider the diagram of the economy’s production function shown on the next
page for the next six questions.
[Q#2] If the country’s labor force was employed to work some 200 billion hours
in total (L=aggregate labor hours), while the economy produced
$12 trillion worth of goods and services (real GDP) then the economy:
(a) has failed to achieve its full potential
(b) reached its full potential level of production
(c) has exceeded its full production potential
[Q#3] Now assume the economy was operating at its full potential GDP level
with 300 billion hours of labor time and an actual GDP = Potential GDP
= $16 trillion (at point B). The economy then declines due to a recession –
with the unemployment rate soaring to 20% - far below full employment.
Which combination best matches the state of the economy now?
(a) Labor Hours = 200 billion ;
(b) Labor Hours = 200 billion ;
(c) Labor Hours = 200 billion ;
GDP = $16 trillion
GDP = $12 trillion
GDP = $8 trillion
[Q#4] Now assume that we know that the Labor Supply (LS) and Labor
Demand (LD) curves/lines intersect at a value of L* = 500 labor hours.
Using the economy’s Production Function directly above, what is the likely
value for Real GDP if the economy is at full resource employment?
(a) @ $16 trillion
(b) @ $17.5 trillion
(c) @ $20 trillion
From the national economy’s production function in the diagram above,
we can note the following data values:
Y = Real GDP Output
$8 trillion
$12 trillion
$16 trillion
L = Labor Time Input
100 billion
200 billion
300 billion
APL = Average Productivity
$____ / hour
$___ / hour
$____ / hour
MPL = Average Productivity
$____ / hour
$___ / hour
$____ / hour
[Q#5] What is the Average Productivity of Labor = APL , when national production
is: Real GDP = at $12 trillion?
(a) $80 per hour
(b) $60 per hour
(c) $53.33 per hour
(d) $40 per hour
[Q#6] What is the Marginal Productivity of Labor = MPL , when national production
is: Real GDP = at $12 trillion?
(a) $80 per hour
(b) $60 per hour
(c) $53.33 per hour
(d) $40 per hour
(Q#7) Consider the diagram of the economy’s production function. If the
economy did push out to 500 billion of total labor hours, what is likely
true of the productivity of the last batch of workers hired at this level.
[a] productivity is likely low with marginal workers of limited workplace value
[b] productivity is likely high with marginal workers of considerable workplace
value
For the next two questions, evaluate this diagram for the U.S. labor market:
[Q#8] The current real wage is $6 per hour. At this wage, in the short run,
what is the likely labor market outcome given by the actual number
of labor hours that will come to be worked and paid for:
(a) 120,000 hours
(b) 140,000 hours
(c) 160,000 hours
[Q#9] What best describes this labor market outcome:
(a) a shortage limited by labor supply
(b) an equilibrium balance between supply and demand
(c) a surplus limited by labor demand
[Q#10] If the labor market is able to adjust through time – with changes in both
the real wage and labor time - and achieve an equilibrium outcome,
what will like be observed:
(a) 120,000 hours of labor time at $6 per hour – limited by labor supply
(b) 140,000 hours of labor time at $9 per hour – set by market balance
(c) 160,000 hours of labor time at $12 per hour – determined by labor demand
Consider this diagram which incorporates a minimum wage mandate on the low
wage/ low skill labor market. First, assume that the number of workers
is measured in millions and not just thousands. Also, assume that the minimum
wage had been $5 per hour and has just been raised to $7 per hour.
At the new $7 minimum wage:
[Q#11] how many workers do companies want to hire
– what is labor demand, LD?
(a) 3 million
(b) 5 million
(c) 7 million
[Q#12] how many workers want a job – what is labor supply, LS?
(a) 3 million
(b) 5 million
(c) 7 million
[Q#13] how many workers actually have a job?
(a) 3 million
(b) 5 million
(c) 7 million
[Q#14] What is the measured unemployment?
(a) 2 million
(b) 4 million
(c) 0
[Q#15] What happens to the number of workers who have a job? It will:
[a] go down by 2 million
[b] stay the same
[c] go up by 2 million
[Q#16 ] What happens to Total Labor Income from the shift of the
minimum wage from $5 to $7 per hour?
(a) it increases from $25 million to $49 million
(b) it declines from $25 million to $15 million
(c) it increases from $25 million to $35 million
(d) it declines from $25 million to $21 million
There is a progressive movement effort to increase the minimum wage to $15 in
as many states as possible. Consider the following data for two scenarios:
Labor Demand
Labor Supply
Scenario #1:
Mass. State Minimum Wage = $13.00
4.0 million
4.0 million
Scenario #2:
Proposed Minimum Wage = $15.00
3.0 million
5.0 million
(Q#17) If the wage is increased from $13.00 to $15.00 and the state economy
switches from Scenario #1 to Scenario #2, what will be the impact on the
employed labor force in the state? (how many will have a job):
(a) a gain of: 2.0 million in total employment
(b) a loss of: 2.0 million in total employment
(c) a gain of: 1.0 million in total employment
(d) a loss of: 1.0 million in total employment
(Q#18) Assume that the data is for each week of the year with a total income
of $52 million earned by all workers collectively with Scenario #1 and a $13
wage. What will be the impact of the higher minimum wage on this total
income earned by all workers collectively?
[a] it will be higher
[b] it will decline
Chapter Eight – Quiz – Potential GDP – Natural Unemployment
[Q#1] Whether as a citizen, a politician, or a policy planner, which %-rate of
unemployment would be ideal for the country in the long run:
(a) 0% rate of unemployment – everyone always has a job and has one at
every point in time
(b) Unemployment that maximizes the stock, bond and real estate markets
– the nation’s wealth – even 10% if need be
(b) A low rate – like 3% – that still allows for economic changes that benefit
the economy in the long run and also promotes ideal job matching
For the following questions, evaluate the labor demand ( LD, LD ) for a business
company. The current average wage/salary rate that the company pays to its
employees is: Wactual = $80 per hour. (This includes all benefits as well.)
The average selling price of its product – exercise bikes – is $700.
[Q#2] Wages now rise by 25% to $100 per hour while the selling prices of its
exercise equipment rises by 10% to: $770 per bike. What happened to
the “real” wage as perceived by the company? It went:
(a) up
(b) down
[Q#3] The company might respond to this change in the effective real wage by:
(a) reducing its workforce
(b) increasing its workforce
[Q#4] Now change the wage-price scenario so that wages now rise by 10% to
$88 per hour while the selling prices of its exercise equipment rises by
30% to: $910 per bike. What has happened now to the “real” wage as
perceived by the company? It went:
(a) Up
(b) Down
[Q#5] The company will respond to this change in the effective real wage by:
(a) reducing its workforce
(b) increasing its workforce
For the following two questions, evaluate the supply of labor ( LS, LS ) for a
worker-consumer. Again, the current average wage/salary rate that the company pays to its employees is: Wactual = $80 per hour. The consumer price index,
now referred to as: PCPI = 250.
[Q#6] Wages now rise by 5% to: Wactual = $84 per hour while prices rise
by 20% with a new CPI value of: PCPI = 300. Thus:
%∆Wage = +5%
%∆Prices = +20%
What has happened to the “real” wage as perceived by the worker-consumer?
(a) the real wage has gone down
(b) the real wage has gone up
[Q#7] The worker-consumer will respond to this change in the perceived
real wage by seeking to:
(a) work more hours
(c) work fewer hours
(Q#8) Consider a labor market that is not in equilibrium. There is a shortage of
labor with too few job seekers compared to available job posts from
companies that want to hire. This would be eliminated most rapidly by:
(a) a reduction in real wages paid to workers reducing the labor supply
(b) an increase in real wages paid to workers increasing the labor supply
(Q#9) By the year 2024 – when Joe Biden stands for re-election as President,
the U.S. may have restored national production to a value equal to that for
potential production (for real GDP) with a full employment “equilibrium”
state. If the economy is in fact in a full employment equilibrium state then
what will be true about the rate of unemployment?
(a) actual rate of unemployment < natural rate of unemployment
(b) actual rate of unemployment > natural rate of unemployment
(c) actual rate of unemployment = natural rate of unemployment
(Q#10) President Donald Trump finally had some back luck. Had the
Coronavirus pandemic never occurred, the economy would have grown
steadily such that by the election, actual national production would exceed
the economy’s rated value for potential production – with the economy
performing in “overdrive” and with production resources utilized beyond a
“100%-capacity” level. If this point had indeed come about then:
(a) actual rate of unemployment = natural rate of unemployment
(b) actual rate of unemployment < natural rate of unemployment
(c) actual rate of unemployment > natural rate of unemployment
[Q#11] When government provides strong legal support for employee rights
and political support for unions and further mandates higher minimum and
prevailing wage rates what is the predicted long run impact on wages and
labor costs in a country’s labor markets?
Labor compensation and costs would likely:
(a) fall below the market equilibrium level
(b) remain at the market equilibrium level
(c) rise above the market equilibrium level
(Q#12) Progressive labor advocates recommend that the U.S. adopt European
style laws and regulations in which employees must be notified far in
advance if they are to be dismissed and then given generous “severance”
payments by their companies. What is the likely consequence from this:
[a] employers would perceive this as adding to their labor costs in the long run
and reduce the number of employees that they would hire
[b] employers would perceive that this would make labor markets more
competitive – by providing power to workers – and respond by hiring
more workers
(Q#13) Consider the “Classical” school of macroeconomic thought which
prevailed from 1870 to 1935. If the economy contracts into a severe
recession then the effect of a substantial reduction in employee
compensation – wages, salaries and benefits – would likely be:
(a) the economy will be quickly restored to full employment equilibrium as
companies hire more workers
(b) the economy will continue to stagnate far from full employment as
households lack income to spend and invest
(Q#14) Consider the “Keynesian” school of macroeconomic thought which
prevailed from 1935 to 1980 – and again in 2009 and 2021. If the economy
contracts into a severe recession then the effect of a substantial reduction in
employee compensation – wages, salaries and benefits – would likely be:
(a) the economy will be quickly restored to full employment equilibrium as
companies hire more workers and gain confidence
(b) the economy will continue to stagnate far from full employment as
households lack income and confidence to spend and invest
(Q#15) President Biden and Congress spent trillions of dollars to stimulate the
economy in response to the economic damage caused by the Coronavirus pandemic and the Ukraine situation.
Which school of economic policy thought would support this?
(a) Classical
(b) Monetarist
(c) Keynesian
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