Tackle the Test: Free-Response Questions

1. Question

   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.

   
   

   
   

   1. What is the value of the price index in 2000?

      
      
   
   

   2. What is the value of the price index in 2020?

      
      
   
   

   3. What is the percentage increase in your nominal income between 2000 and 2020?

      
      
   
   

   4. What has happened to your real income between 2000 and 2020? Explain.

      
      
   
   

   Rubric for FRQ 1 (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. Question

   The accompanying table contains the values of the CPI for 2012 and 2013.

   
   

   
   

   1. What does the CPI measure?

      
      
   
   

   2. Calculate the inflation rate from 2012 to 2013. (2 points)

      
      
   
   

   
   

   
   

   
   

   
   
   
   
   
   
   
   
   
   
   
   
   
   
   

   Year	CPI
   2012	229.6
   2013	233.0
   (2 points)

   
   

   Rubric for FRQ 2 (2 points)

   1 point: The CPI measures the cost of the market basket of a typical urban family in the United States.

   1 point: (233.0 − 229.6)/229.6 × 100 = 1.5%