Question 1

How are the weights on the various goods and services in the CPI basket determined?

Accepted Answer

A)  Each good and service is weighted according to its quantity. 
B)  A survey is conducted to determine how much of each good and service typical consumers purchase. 
C)  The weights equal the ratio of expenditures on each good or service divided by the total consumption expenditures in the GDP accounts. 
D)  Each good and service is weighted according to its price. 
A)  Each good and service is weighted according to its quantity. 
B)  A survey is conducted to determine how much of each good and service typical consumers purchase. 
C)  The weights equal the ratio of expenditures on each good or service divided by the total consumption expenditures in the GDP accounts. 
D)  Each good and service is weighted according to its price.

Question 2

What is an important difference between the GDP deflator and the consumer price index?

Accepted Answer

A)  The GDP deflator reflects the prices of goods and services bought by producers, whereas the consumer price index reflects the prices of goods and services bought by consumers. 
B)  The GDP deflator reflects the prices of all final goods and services produced domestically, whereas the consumer price index reflects the prices of some goods and services bought by consumers. 
C)  The GDP deflator reflects the prices of all final goods and services produced by a nation's citizens, whereas the consumer price index reflects the prices of final goods and services bought by consumers. 
D)  The GDP deflator reflects the prices of all goods and services bought by producers and consumers, whereas the consumer price index reflects the prices of final goods and services bought by consumers. 
A)  The GDP deflator reflects the prices of goods and services bought by producers, whereas the consumer price index reflects the prices of goods and services bought by consumers. 
B)  The GDP deflator reflects the prices of all final goods and services produced domestically, whereas the consumer price index reflects the prices of some goods and services bought by consumers. 
C)  The GDP deflator reflects the prices of all final goods and services produced by a nation's citizens, whereas the consumer price index reflects the prices of final goods and services bought by consumers. 
D)  The GDP deflator reflects the prices of all goods and services bought by producers and consumers, whereas the consumer price index reflects the prices of final goods and services bought by consumers.

Question 3

Which statement best explains whether interest rates are positive or negative?

Accepted Answer

A)  Real interest rates can be either positive or negative, but nominal interest rates must be positive. 
B)  Real interest rates and nominal interest rates must be positive. 
C)  Real interest rates must be positive, but nominal interest rates can be either positive or negative. 
D)  Real interest rates and nominal interest rates can be either positive or negative. 
A)  Real interest rates can be either positive or negative, but nominal interest rates must be positive. 
B)  Real interest rates and nominal interest rates must be positive. 
C)  Real interest rates must be positive, but nominal interest rates can be either positive or negative. 
D)  Real interest rates and nominal interest rates can be either positive or negative.

Question 4

-Refer to Table 6-1. Suppose that the typical consumer basket consists of 5 bushels of peaches and 10 bushels of apples and that the base year is 2018. What is the consumer price index for 2019?

Accepted Answer

A)  80 
B)  100 
C)  120 
D)  125 
A)  80 
B)  100 
C)  120 
D)  125

Question 5

What does the nominal interest rate tell you?

Accepted Answer

A)  how fast the number of dollars in your bank account rises over time 
B)  how fast the purchasing power of your bank account rises over time 
C)  the number of dollars in your bank account 
D)  the purchasing power of your bank account 
A)  how fast the number of dollars in your bank account rises over time 
B)  how fast the purchasing power of your bank account rises over time 
C)  the number of dollars in your bank account 
D)  the purchasing power of your bank account

Question 6

Which of the following is by far the largest category of goods and services in the CPI basket?

Accepted Answer

A)  shelter 
B)  clothing and footwear 
C)  household operations and furnishings 
D)  food 
A)  shelter 
B)  clothing and footwear 
C)  household operations and furnishings 
D)  food

Question 7

Wayne collected indexed pension benefits of $400 a month in 2018. If the price index rose from 210 to 220 in the period 2018-2019, what should his pension benefits for 2019 be?

Accepted Answer

A)  $381.82 
B)  $419.05 
C)  $440.00 
D)  $880.00 
A)  $381.82 
B)  $419.05 
C)  $440.00 
D)  $880.00

Question 8

What does "substitution bias" in the consumer price index refer to?

Accepted Answer

A)  replacing old goods with new goods in consumer purchases 
B)  replacing low-quality goods with high-quality goods in consumer purchases 
C)  replacing expensive goods with cheaper goods in consumer purchases 
D)  replacing old technology goods with new technology goods in consumer purchases 
A)  replacing old goods with new goods in consumer purchases 
B)  replacing low-quality goods with high-quality goods in consumer purchases 
C)  replacing expensive goods with cheaper goods in consumer purchases 
D)  replacing old technology goods with new technology goods in consumer purchases

Question 9

If the cost of health and personal care increases by 20 percent, then, other things the same, how much is the CPI likely to increase?

Accepted Answer

A)  by about 1 percent 
B)  by about 2 percent 
C)  by about 3 percent 
D)  by about 4 percent 
A)  by about 1 percent 
B)  by about 2 percent 
C)  by about 3 percent 
D)  by about 4 percent

Question 10

In 1964 in London, Ontario, one could buy a fish and chips for $2.00; today the same fish and chips cost $5.55. Which set of CPIs represents the same purchasing power for the cost in 1964 and the cost today?

Accepted Answer

A)  60 in 1964 and 141.6 today 
B)  75 in 1964 and 126.4 today 
C)  80 in 1964 and 112.0 today 
D)  90 in 1964 and 250.0 today 
A)  60 in 1964 and 141.6 today 
B)  75 in 1964 and 126.4 today 
C)  80 in 1964 and 112.0 today 
D)  90 in 1964 and 250.0 today

Question 11

If nominal interest rates rise, it must be because inflation rose.

Accepted Answer

A) True 
 B)False

Question 12

Noah puts money in the bank and earns a 7 percent nominal interest rate. What happens if the inflation rate is 3 percent?

Accepted Answer

A)  Ralph will have 3 percent more money, which will purchase 5 percent more goods. 
B)  Ralph will have 3 percent more money, which will purchase 10 percent more goods. 
C)  Ralph will have 7 percent more money, which will purchase 4 percent more goods. 
D)  Ralph will have 7 percent more money, which will purchase 10 percent more goods. 
A)  Ralph will have 3 percent more money, which will purchase 5 percent more goods. 
B)  Ralph will have 3 percent more money, which will purchase 10 percent more goods. 
C)  Ralph will have 7 percent more money, which will purchase 4 percent more goods. 
D)  Ralph will have 7 percent more money, which will purchase 10 percent more goods.

Question 13

The Bank of Canada regularly announces the inflation rate. Many economic aspects, such as employment, wages, loans, interest rates, and business contracts are influenced by the announced inflation rate. Thus, the way the inflation rate is determined has important consequences on many people's lives. Let us construct a very simplified economic model to illustrate the implications of changing the composition of the CPI basket, which in turn determines how the inflation rate is calculated.
Think of an economy consisting of two people, Betty and Trent. They only consume books and food: Betty receives meals for free from a foreign admirer, and she only buys 20 books a week for the price of $4 apiece. Trent has no time to read, so that he buys 14 meals a week for the price of $10 apiece.
a) Calculate Betty and Trent's expenditures and their total expenditure.
b) Suppose the price of meals increases by 10 percent, to $11. Calculate the CPI inflation rate, and compare the increases in expenditures implied by this rate with the actual increases in expenditures for each individual.
c) Suppose the government wishes to compensate consumers for the increase in prices by an amount determined by the CPI inflation. Who benefits more by this compensation, Betty or Trent?

Accepted Answer

a) Betty's expenditure is 20×$4=$80; Tre

Question 14

The price index in the first year is 100, in the second year is 90, and in the third year is 80. What is the deflation rate between the first and second year, and between the second and third year?

Accepted Answer

A)  11 percent between the first and second year, 11 percent between the second and third year 
B)  11 percent between the first and second year, 12 percent between the second and third year 
C)  10 percent between the first and second year, 11 percent between the second and third year 
D)  10 percent between the first and second year, 12 percent between the second and third year 
A)  11 percent between the first and second year, 11 percent between the second and third year 
B)  11 percent between the first and second year, 12 percent between the second and third year 
C)  10 percent between the first and second year, 11 percent between the second and third year 
D)  10 percent between the first and second year, 12 percent between the second and third year

Question 15

Substitution bias in computing the CPI tends to make the CPI overstate the true increase in the cost of living.

Accepted Answer

A) True 
 B)False

Question 16

In 1964, Harvey bought a Ford Mustang for $2,368. In 2019, he bought another new Ford Mustang for $32,000. If the price index in 1964 was 35 and the price index in 2019 was 200, what is the price of the 1964 Ford Mustang in 2019 prices?

Accepted Answer

A)  $5600 
B)  $11200 
C)  $13531 
D)  $16000 
A)  $5600 
B)  $11200 
C)  $13531 
D)  $16000

Question 17

Ms. Smith borrowed $1000 from her bank for one year at an interest rate of 10 percent per year. During that year the price level went up by 15 percent. Who loses and who gains because of the unexpected inflation?

Accepted Answer

A)  Ms. Smith loses 5 percent, but the bank gains 5 percent. 
B)  Ms. Smith gains 5 percent, but the bank loses 5 percent. 
C)  Ms. Smith loses 10 percent, but the bank gains 5 percent. 
D)  Ms. Smith gains 10 percent, but the bank loses 5 percent. 
A)  Ms. Smith loses 5 percent, but the bank gains 5 percent. 
B)  Ms. Smith gains 5 percent, but the bank loses 5 percent. 
C)  Ms. Smith loses 10 percent, but the bank gains 5 percent. 
D)  Ms. Smith gains 10 percent, but the bank loses 5 percent.

Question 18

An economy only consumes two goods: food and recreation. The current shares in total expenditure are 60 percent food and 40 percent recreation. Suppose the price of food increases by 4 percent and the price of recreation increases by 2 percent. What is the change in the CPI?

Accepted Answer

The CPI is a weighted average of the rat

Question 19

Chip's Chocolate Factory has an agreement with its workers to completely index the wages of its employees to inflation in the CPI. Chip's currently pays its production line workers $20 an hour and is scheduled to index their wages today. If the CPI is currently about 120 and was 100 a year ago, by how much should Chip's increase the hourly wages of its workers?

Accepted Answer

A)  $0.58 
B)  $0.65 
C)  $1.00 
D)  $4.00 
A)  $0.58 
B)  $0.65 
C)  $1.00 
D)  $4.00

Question 20

How does a rise in the consumer price index affect a typical family?

Accepted Answer

A)  The typical family has to spend more dollars to maintain the same standard of living. 
B)  The typical family can spend fewer dollars to maintain the same standard of living. 
C)  The typical family finds that its standard of living is not affected. 
D)  The typical family can offset the effects of rising prices by saving more. 
A)  The typical family has to spend more dollars to maintain the same standard of living. 
B)  The typical family can spend fewer dollars to maintain the same standard of living. 
C)  The typical family finds that its standard of living is not affected. 
D)  The typical family can offset the effects of rising prices by saving more.

How are the weights on the various goods and services in the CPI basket determined?

What is an important difference between the GDP deflator and the consumer price index?

Which statement best explains whether interest rates are positive or negative?

-Refer to Table 6-1. Suppose that the typical consumer basket consists of 5 bushels of peaches and 10 bushels of apples and that the base year is 2018. What is the consumer price index for 2019?

What does the nominal interest rate tell you?

Which of the following is by far the largest category of goods and services in the CPI basket?

Wayne collected indexed pension benefits of $400 a month in 2018. If the price index rose from 210 to 220 in the period 2018-2019, what should his pension benefits for 2019 be?

What does "substitution bias" in the consumer price index refer to?

If the cost of health and personal care increases by 20 percent, then, other things the same, how much is the CPI likely to increase?

In 1964 in London, Ontario, one could buy a fish and chips for $2.00; today the same fish and chips cost $5.55. Which set of CPIs represents the same purchasing power for the cost in 1964 and the cost today?

If nominal interest rates rise, it must be because inflation rose.

Noah puts money in the bank and earns a 7 percent nominal interest rate. What happens if the inflation rate is 3 percent?

The price index in the first year is 100, in the second year is 90, and in the third year is 80. What is the deflation rate between the first and second year, and between the second and third year?

Substitution bias in computing the CPI tends to make the CPI overstate the true increase in the cost of living.

In 1964, Harvey bought a Ford Mustang for $2,368. In 2019, he bought another new Ford Mustang for $32,000. If the price index in 1964 was 35 and the price index in 2019 was 200, what is the price of the 1964 Ford Mustang in 2019 prices?

Ms. Smith borrowed $1000 from her bank for one year at an interest rate of 10 percent per year. During that year the price level went up by 15 percent. Who loses and who gains because of the unexpected inflation?

An economy only consumes two goods: food and recreation. The current shares in total expenditure are 60 percent food and 40 percent recreation. Suppose the price of food increases by 4 percent and the price of recreation increases by 2 percent. What is the change in the CPI?

How does a rise in the consumer price index affect a typical family?

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Measuring a Nations Income

Production and Growth

Saving, Investment, and the Financial System

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Small Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary Policy on Aggregate Demand

The Influence of Fiscal Policy on Aggregate Demand

The Short-Run Tradeoff Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

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Exam 6: Measuring the Cost of Living

How are the weights on the various goods and services in the CPI basket determined?

What is an important difference between the GDP deflator and the consumer price index?

Which statement best explains whether interest rates are positive or negative?

-Refer to Table 6-1. Suppose that the typical consumer basket consists of 5 bushels of peaches and 10 bushels of apples and that the base year is 2018. What is the consumer price index for 2019?

What does the nominal interest rate tell you?

Which of the following is by far the largest category of goods and services in the CPI basket?

Wayne collected indexed pension benefits of $400 a month in 2018. If the price index rose from 210 to 220 in the period 2018-2019, what should his pension benefits for 2019 be?

What does "substitution bias" in the consumer price index refer to?

If the cost of health and personal care increases by 20 percent, then, other things the same, how much is the CPI likely to increase?

In 1964 in London, Ontario, one could buy a fish and chips for $2.00; today the same fish and chips cost $5.55. Which set of CPIs represents the same purchasing power for the cost in 1964 and the cost today?

If nominal interest rates rise, it must be because inflation rose.

Noah puts money in the bank and earns a 7 percent nominal interest rate. What happens if the inflation rate is 3 percent?

The price index in the first year is 100, in the second year is 90, and in the third year is 80. What is the deflation rate between the first and second year, and between the second and third year?

Substitution bias in computing the CPI tends to make the CPI overstate the true increase in the cost of living.

In 1964, Harvey bought a Ford Mustang for $2,368. In 2019, he bought another new Ford Mustang for $32,000. If the price index in 1964 was 35 and the price index in 2019 was 200, what is the price of the 1964 Ford Mustang in 2019 prices?

Ms. Smith borrowed $1000 from her bank for one year at an interest rate of 10 percent per year. During that year the price level went up by 15 percent. Who loses and who gains because of the unexpected inflation?

An economy only consumes two goods: food and recreation. The current shares in total expenditure are 60 percent food and 40 percent recreation. Suppose the price of food increases by 4 percent and the price of recreation increases by 2 percent. What is the change in the CPI?

How does a rise in the consumer price index affect a typical family?

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Measuring a Nations Income

Production and Growth

Saving, Investment, and the Financial System

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Small Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary Policy on Aggregate Demand

The Influence of Fiscal Policy on Aggregate Demand

The Short-Run Tradeoff Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

Filters