# Quiz 1 answers and feedback - Question 1 A family consumes...

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Question 1 A family consumes 1 pizza for \$10 and 20 bottles of coke at \$2 each in year 1, for which the CPI is 100. Calculate the new CPI if the price of coke falls to \$1 and the price of pizzas rises to \$20: Answer 120 112.5 95 80 75 Year 1 (before price changes): Expenditure = (1 x \$10) + (20 x \$2) = \$50 After the changes: Expenditures = (1x \$20) + (20 x \$1) = \$40 For the same (fixed) basket (quantities), the expenditure has fallen by 20%. So, if the CPI was 100 for \$50, it is straightforward to work out what CPI is for \$40. Question 2 There are 10.2 million employed in an economy with a total civilian population of 15.4 million. If 4.2 million people are out of the labour force from the working age population, what is the unemployment rate? Answer 7.14 percent 8.23 percent 8.93 percent 21.43 percent 27.5 percent Labour Force = 15.4 – 4.2 = 11.2 Employed = 10.2 Unemployment Rate = Unemployed/Labour Force = (11.2 – 10.2)/11.2 Question 3 A possible explanation for Australia's declining level of household savings is Answer A falling stock market Rising house prices

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Increasing government budget surpluses High interest rates over the past 40 years All of the above. Rise in asset prices can explain. See textbook and lecture notes for details. Question 4 The consumer price index (CPI) may overestimate the true inflation rate mostly because Answer It does not take into account producer price inflation. The underlying consumption basket is rarely altered over time. It is only measured on a quarterly basis It includes some imported items. None of the above CPI is a fixed weight price index. See textbook and lecture notes for details. Question 5 The island of Freedonia has two residents, Stan and Fran. In year one Freedonia produces goods worth \$500, and consumption is divided evenly between Stan and Fran, so that each consumes \$250 worth of goods. In year two, the real value of production rises to \$600, but this time Fran receives \$500 worth of goods and Stan receives only \$100 worth of goods. What can we say about the GDP and collective welfare of Freedonia in year two relative to year one? Answer Neither GDP nor welfare has risen GDP has risen and welfare has fallen GDP has risen and welfare has stayed the same GDP has stayed the same and welfare has risen GDP has risen but we cannot be sure what has happened to welfare GDP (also per capita GDP) has risen but welfare is a concept including many dimensions, and hence GDP (or per capita GDP) alone cannot say anything about
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Quiz 1 answers and feedback - Question 1 A family consumes...

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