Question 1

Which of the following is the most accurate statement 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 plus the rate of inflation 
C) The real interest rate is the nominal interest rate minus the rate of inflation 
D) The real interest rate is the nominal interest rate divided by the rate of inflation 
E) None of the above are accurate statements 
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 plus the rate of inflation 
C) The real interest rate is the nominal interest rate minus the rate of inflation 
D) The real interest rate is the nominal interest rate divided by the rate of inflation 
E) None of the above are accurate statements C

Question 2

On 1 January 2000, Edward invested $10 000 at five per cent interest for one year.The CPI on 1 January 2000 stood at 1.60.On 1 January 2001, the CPI was 1.76.
a.What is the real interest rate?
b.If Edward borrowed the $10 000 from Jack at 10 per cent interest for one year, who benefits and who loses in this situation?

Accepted Answer

a.The real interest rate is minus five per cent.b.With a negative real interest rate, the lender, Jack, loses, and the borrower, Edward, benefits.

Question 3

For any given year, the CPI is:

Accepted Answer

A) the price of the basket of goods and services in the base year divided by the price of the basket in the given year, then multiplied by 100 
B) higher than the previous year 
C) the price of the basket of goods and services in the given year divided by the price of the basket in the base year, then multiplied by 100 
D) the price of the basket of goods and services in the base year divided by the price of the basket in the given year, then divided by 100 
A) the price of the basket of goods and services in the base year divided by the price of the basket in the given year, then multiplied by 100 
B) higher than the previous year 
C) the price of the basket of goods and services in the given year divided by the price of the basket in the base year, then multiplied by 100 
D) the price of the basket of goods and services in the base year divided by the price of the basket in the given year, then divided by 100 C

Question 4

If the real interest rate is three per cent and the inflation rate is seven per cent, then the nominal interest rate equals:

Accepted Answer

A) three per cent 
B) four per cent 
C) seven per cent 
D) 10 per cent 
A) three per cent 
B) four per cent 
C) seven per cent 
D) 10 per cent

Question 5

If all prices, including the price of beef, increase by 3%, then the relative price of beef has ____ and there _____ inflation.

Accepted Answer

A) increased; is 
B) increased; is no 
C) remained constant; is 
D) remained constant; is no 
A) increased; is 
B) increased; is no 
C) remained constant; is 
D) remained constant; is no

Question 6

An increase in the price of a domestically produced capital good will increase the GDP deflator but not the CPI.

Accepted Answer

A) True 
 B)False

Question 7

Suppose that the residents of Fashionland spend all of their income on dresses, hats and shoes.In 2010, they buy four dresses for $800, five hats for $500 and two pairs of shoes for $400.In 2011 they buy five dresses for $900, five hats for $600 and four pairs of shoes for $600.
a.If the base year is 2010, what is the CPI in both years?
b.What is the inflation rate in 2011?

Accepted Answer

a.The fixed basket of goods is four dres

Question 8

Suppose the value of the CPI is 1.10 in year one, 1.16 in year two, and 1.27 in year three.Assume also that the price of computers increases by three per cent between year one and year two, and by another three per cent between year two and year three.The price level is increasing, the inflation rate is _______, and the relative price of computers is _________.

Accepted Answer

A) increasing; increasing 
B) constant; increasing 
C) constant; decreasing 
D) increasing; decreasing 
A) increasing; increasing 
B) constant; increasing 
C) constant; decreasing 
D) increasing; decreasing

Question 9

When the overall level of prices in the economy is increasing, we say that the economy is experiencing:

Accepted Answer

A) economic growth 
B) unemployment 
C) inflation 
D) deflation 
A) economic growth 
B) unemployment 
C) inflation 
D) deflation

Question 10

An increase in the price of domestically produced industrial robots will be reflected in:

Accepted Answer

A) both the GDP deflator and the CPI 
B) neither the GDP deflator nor the CPI 
C) the GDP deflator but not in the CPI 
D) the CPI but not in the GDP deflator 
A) both the GDP deflator and the CPI 
B) neither the GDP deflator nor the CPI 
C) the GDP deflator but not in the CPI 
D) the CPI but not in the GDP deflator

Question 11

Indexation is a way of compensating beneficiaries for rises in prices.

Accepted Answer

A) True 
 B)False

Question 12

If you borrow money at what you believe is an appropriate interest rate for the level of expected inflation, but the actual inflation rate turns out to be much higher than you had expected:

Accepted Answer

A) you will be paying the loan back with dollars that have much less purchasing power than you had expected 
B) you will be paying the loan back with dollars that have much higher purchasing power than you had expected 
C) you will be paying the loan back with dollars that have the same purchasing power as the dollars you borrowed 
D) you, the borrower, will gain from an intended redistribution of wealth 
A) you will be paying the loan back with dollars that have much less purchasing power than you had expected 
B) you will be paying the loan back with dollars that have much higher purchasing power than you had expected 
C) you will be paying the loan back with dollars that have the same purchasing power as the dollars you borrowed 
D) you, the borrower, will gain from an intended redistribution of wealth

Question 13

The CPI can be used to turn dollar figures into meaningful measures of purchasing power.

Accepted Answer

A) True 
 B)False

Question 14

Susan Webster deposits $1000 for a year in a bank account that pays an annual interest rate of 4 per cent.If the inflation rate is 6 per cent, then Susan's purchasing power has approximately:

Accepted Answer

A) risen by two per cent 
B) fallen by 2 per cent 
C) fallen by 12 per cent 
D) risen by 12 per cent 
A) risen by two per cent 
B) fallen by 2 per cent 
C) fallen by 12 per cent 
D) risen by 12 per cent

Question 15

Which is the most accurate statement about the CPI?

Accepted Answer

A) When the CPI increases, the average family has to spend less to maintain its standard of living 
B) When the CPI increases, the average family has to spend more to maintain its standard of living 
C) When the CPI increases, the standard of living of the average family increases 
D) The CPI has nothing to do with the average family's standard of living 
A) When the CPI increases, the average family has to spend less to maintain its standard of living 
B) When the CPI increases, the average family has to spend more to maintain its standard of living 
C) When the CPI increases, the standard of living of the average family increases 
D) The CPI has nothing to do with the average family's standard of living

Question 16

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

Accepted Answer

A) A survey is conducted to determine how much of each good and service a typical consumer purchases 
B) All goods and services are weighted equally 
C) Each good and service is weighted according to its price 
D) Weights are randomly assigned 
A) A survey is conducted to determine how much of each good and service a typical consumer purchases 
B) All goods and services are weighted equally 
C) Each good and service is weighted according to its price 
D) Weights are randomly assigned

Question 17

The CPI is calculated from a basket of goods that every consumer purchases each period, and is based on a household consumer preferences survey.

Accepted Answer

A) True 
 B)False

Question 18

The basket of goods costs $80 in 2011 and $140 in 2012.What is the CPI in 2012 when the base year is the year 2011?

Accepted Answer

A) 57 
B) 140 
C) 175 
D) 60 
A) 57 
B) 140 
C) 175 
D) 60

Question 19

CPI may overestimate the true rate of inflation.

Accepted Answer

A) True 
 B)False

Question 20

There is debate among economists about measurement problems of the CPI.Economists' best estimate of the CPI's degree of overstatement in the cost of living is:

Accepted Answer

A) about 0.1 per cent 
B) about one per cent 
C) about three per cent 
D) about five per cent 
A) about 0.1 per cent 
B) about one per cent 
C) about three per cent 
D) about five per cent

Exam 25: Measuring the Cost of Living

Which of the following is the most accurate statement about the relationship between the nominal interest rate and the real interest rate?

For any given year, the CPI is:

If the real interest rate is three per cent and the inflation rate is seven per cent, then the nominal interest rate equals:

If all prices, including the price of beef, increase by 3%, then the relative price of beef has ____ and there _____ inflation.

An increase in the price of a domestically produced capital good will increase the GDP deflator but not the CPI.

When the overall level of prices in the economy is increasing, we say that the economy is experiencing:

An increase in the price of domestically produced industrial robots will be reflected in:

Indexation is a way of compensating beneficiaries for rises in prices.

If you borrow money at what you believe is an appropriate interest rate for the level of expected inflation, but the actual inflation rate turns out to be much higher than you had expected:

The CPI can be used to turn dollar figures into meaningful measures of purchasing power.

Susan Webster deposits $1000 for a year in a bank account that pays an annual interest rate of 4 per cent.If the inflation rate is 6 per cent, then Susan's purchasing power has approximately:

Which is the most accurate statement about the CPI?

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

The CPI is calculated from a basket of goods that every consumer purchases each period, and is based on a household consumer preferences survey.

The basket of goods costs $80 in 2011 and $140 in 2012.What is the CPI in 2012 when the base year is the year 2011?

CPI may overestimate the true rate of inflation.

There is debate among economists about measurement problems of the CPI.Economists' best estimate of the CPI's degree of overstatement in the cost of living is:

Ten Lessons From 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

Application: 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

Business Strategy and Oligopoly

Competition Policy

The Markets for the Factors of Production

Earnings, Unions and Discrimination

Income Inequity and Poverty

The Theory of Consumer Choice

Frontiers of Microeconomics

Measuring a Nations Income

Production and Growth

Saving, Investment and the Financial System

The Natural Rate of Unemployment

The Monetary System

Inflation: Its Causes and Costs

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 Trade-Off Between Inflation and Unemployment

Global Financial Crisis of 2008 and Beyond

Five Debates Over Macroeconomic Policy

Filters

If all prices, including the price of beef, increase by 3%, then the relative price of beef has and there _ inflation.