Question 1

Persistent increases in the overall level of prices have been the norm.

Accepted Answer

A) True 
 B)False

Question 2

The real interest rate tells 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 today. 
D) the purchasing power of your bank account today. 
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 today. 
D) the purchasing power of your bank account today.

Question 3

The value of the consumer price index increased from 140 to 147 during 2006. Nathan opened a bank account at the beginning of 2006, and at the end of 2006 his account balance was $12,840. The purchasing power of Nathan's account increased by 2 percent during the year. We can conclude that Nathan opened his account with a deposit of $11,500 at the beginning of 2006.

Accepted Answer

A) True 
 B)False

Question 4

When the consumer price index rises, the typical family

Accepted Answer

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

Question 5

Jay and Joyce meet George, the banker, to work out the details of a mortgage. They all expect that inflation will be 2 percent over the term of the loan, and they agree on a nominal interest rate of 6 percent. As it turns out, the inflation rate is 5 percent over the term of the loan.
a.What was the expected real interest rate?
b.What was the actual real interest rate?
c.Who benefited and who lost because of the unexpected inflation?

Accepted Answer

a.
The expected real interest rate was 4

Question 6

Explain how the prices of goods and services used in the CPI differ from the prices used in the PPI.

Accepted Answer

The CPI focuses on goods and s

Question 7

Which of the following statements is correct about the relationship between the nominal interest rate and the real interest rate?

Accepted Answer

A) The real interest rate is the nominal interest rate times the rate of inflation. 
B) The real interest rate is the nominal interest rate minus the rate of inflation. 
C) The real interest rate is the nominal interest rate plus the rate of inflation. 
D) The real interest rate is the nominal interest rate divided by the rate of inflation. 
A) The real interest rate is the nominal interest rate times the rate of inflation. 
B) The real interest rate is the nominal interest rate minus the rate of inflation. 
C) The real interest rate is the nominal interest rate plus the rate of inflation. 
D) The real interest rate is the nominal interest rate divided by the rate of inflation.

Question 8

Abjihit deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Abjihit withdraws his $105. If inflation was 2 percent during the year the money was deposited, then Abjihit's purchasing power has increased by 3 percent.

Accepted Answer

A) True 
 B)False

Question 9

Indexation refers to

Accepted Answer

A) a process of adjusting the nominal interest rate so that it is equal to the real interest rate. 
B) using a law or contract to automatically correct a dollar amount for the effects of inflation. 
C) using a price index to deflate dollar values. 
D) an adjustment made by the Bureau of Labor Statistics to the CPI so that the index is in line with the GDP deflator. 
A) a process of adjusting the nominal interest rate so that it is equal to the real interest rate. 
B) using a law or contract to automatically correct a dollar amount for the effects of inflation. 
C) using a price index to deflate dollar values. 
D) an adjustment made by the Bureau of Labor Statistics to the CPI so that the index is in line with the GDP deflator.

Question 10

The table below lists the prices of chips and salsa for the months of October, November, and December. Assume that the typical consumer buys 8 bags of chips and 4 jars of salsa each month, and that October is the base period.
$\begin{array} { | l | l | l | } 
\hline \text { Month } & \text { Price of Chips } & \text { Price of Salsa } \
\hline \text { October } & \$ 2.50 & \$ 2.50 \
\hline \text { November } & \$ 2.40 & \$ 2.55 \
\hline \text { December } & \$ 2.60 & \$ 2.75 \
\hline
\end{array}$
-Calculate the inflation rate for November.

Accepted Answer

Cost of basket, Oct ($) = 2.5 x 8 + 2.5

Question 11

Changes in the consumer price index are useful in predicting changes in the producer price index.

Accepted Answer

A) True 
 B)False

Question 12

In a simple economy, people consume only 2 goods, food and clothing. The market basket of goods used to compute the CPI consists of 50 units of food and 10 units of clothing.
 $$\begin{array} { | l | l | l | } 
\hline & \text { Food } & \text { Clothing } \
\hline 2002 \text { price per unit } & \$ 4 & \$ 10 \
\hline 2003 \text { price per unit } & \$ 6 & \$ 20 \
\hline
\end{array}$$ 
a.What are the percentage increases in the price of food and in the price of clothing?
b.What is the percentage increase in the CPI?
c.Do these price changes affect all consumers to the same extent? Explain.

Accepted Answer

a.
The price of food increased by 50 per

Question 13

During periods of deflation, the real interest rate will be lower than the nominal interest rate.​

Accepted Answer

A) True 
 B)False

Question 14

Suppose a basket of goods and services has been selected to calculate the CPI and Year 1 has been selected as the base year. In Year 1, the basket's cost was $50; in Year 2, the basket's cost was $52; and in Year 3, the basket's cost was $55. The value of the CPI in Year 3 was

Accepted Answer

A) 90.9. 
B) 104.0. 
C) 105.0. 
D) 110.0. 
A) 90.9. 
B) 104.0. 
C) 105.0. 
D) 110.0.

Question 15

There is no longer much debate among economists concerning the severity of and the solution to the problems in using the CPI to measure the cost of living.

Accepted Answer

A) True 
 B)False

Question 16

Core CPI is a price index that only looks at the prices of food and energy and ignores the prices of all other goods and services.

Accepted Answer

A) True 
 B)False

Question 17

The producer price index measures the cost of a basket of goods and services bought by firms rather than consumers.

Accepted Answer

A) True 
 B)False

Question 18

The real interest rate is the interest rate corrected for inflation.

Accepted Answer

A) True 
 B)False

Question 19

Because the consumer price index reflects the goods and services bought by consumers better than the GDP deflator does, it is the more common gauge of inflation.

Accepted Answer

A) True 
 B)False

Question 20

Table 24-4
Lee's expenditures on food for three consecutive years, along with other values, are presented in the following table.
​
​
  
-Refer to Table 24-4. Suppose Lee's Year 2 food expenditures in Year 3 dollars amount to $9,030. Then x, the consumer price index for Year 3, has a value of

Accepted Answer

A) 8,441. 
B) 7,866. 
C) 8,327. 
D) 166.5. 
A) 8,441. 
B) 7,866. 
C) 8,327. 
D) 166.5.

Exam 24: Measuring the Cost of Living

Persistent increases in the overall level of prices have been the norm.

The real interest rate tells you

When the consumer price index rises, the typical family

Explain how the prices of goods and services used in the CPI differ from the prices used in the PPI.

Which of the following statements is correct about the relationship between the nominal interest rate and the real interest rate?

Abjihit deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Abjihit withdraws his $105. If inflation was 2 percent during the year the money was deposited, then Abjihit's purchasing power has increased by 3 percent.

Indexation refers to

Changes in the consumer price index are useful in predicting changes in the producer price index.

During periods of deflation, the real interest rate will be lower than the nominal interest rate.​

Suppose a basket of goods and services has been selected to calculate the CPI and Year 1 has been selected as the base year. In Year 1, the basket's cost was $50; in Year 2, the basket's cost was $52; and in Year 3, the basket's cost was $55. The value of the CPI in Year 3 was

There is no longer much debate among economists concerning the severity of and the solution to the problems in using the CPI to measure the cost of living.

Core CPI is a price index that only looks at the prices of food and energy and ignores the prices of all other goods and services.

The producer price index measures the cost of a basket of goods and services bought by firms rather than consumers.

The real interest rate is the interest rate corrected for inflation.

Because the consumer price index reflects the goods and services bought by consumers better than the GDP deflator does, it is the more common gauge of inflation.

Table 24-4 Lee's expenditures on food for three consecutive years, along with other values, are presented in the following table. ​ ​ -Refer to Table 24-4. Suppose Lee's Year 2 food expenditures in Year 3 dollars amount to $9,030. Then x, the consumer price index for Year 3, has a value of

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply, Demand, and Government Policies

Consumers, Producers, and the Efficiency of Markets

Applications: The Costs of Taxation

Application: International Trade

Externalities

Public Goods and Common Resources

The Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Monopolistic Competition

Oligopoly

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers in Microeconomics

Measuring a Nations Income

Production and Growth

Saving, Investment, and the Financial System

Tools of Finance

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Tradeoff Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

Filters

During periods of deflation, the real interest rate will be lower than the nominal interest rate.

Table 24-4 Lee's expenditures on food for three consecutive years, along with other values, are presented in the following table. -Refer to Table 24-4. Suppose Lee's Year 2 food expenditures in Year 3 dollars amount to $9,030. Then x, the consumer price index for Year 3, has a value of