Question 1

If workers and employers expecting three per cent inflation agree to a three-year wage contract, and inflation turns out to be five per cent, then:

Accepted Answer

A) workers gain and employers gain 
B) workers gain and employers lose 
C) workers lose and employers gain 
D) workers lose and employers lose 
A) workers gain and employers gain 
B) workers gain and employers lose 
C) workers lose and employers gain 
D) workers lose and employers lose

Question 2

Masako buys a house in 1999.She obtains a mortgage that carries an annual interest rate of 12 per cent, and makes payments of $880 per month.The CPI in 1999 is 100, in 2000 it is 110, and in 2001 it is 120.What is the inflation rate in 2001?

Accepted Answer

A) 120 per cent 
B) 20 per cent 
C) 10 per cent 
D) nine per cent 
A) 120 per cent 
B) 20 per cent 
C) 10 per cent 
D) nine per cent

Question 3

The substitution bias refers to choices consumers make between the categories of goods that form the basis for the CPI calculation.

Accepted Answer

A) True 
 B)False

Question 4

The CPI is a perfect measure of the cost of living.

Accepted Answer

A) True 
 B)False

Question 5

The basket of goods has remained the same since 2000, as common consumer preferences have tended to stay constant.

Accepted Answer

A) True 
 B)False

Question 6

Which change in the price index shows the greatest rate of inflation: 100 to 110, 150 to 165, or 180 to 198?

Accepted Answer

A) The first 
B) The second 
C) The third 
D) They are all the same rate 
A) The first 
B) The second 
C) The third 
D) They are all the same rate

Question 7

Table 1 shows the following amounts for the years 2010 to 2012. $\begin{array}{|l|l|l|}
\hline \text { Year } & \text { Nominal GDP } & \text { Real GDP } \
\hline 2010 & \$ 500 & \$ 500 \
\hline 2011 & \$ 600 & \$ 545.5 \
\hline 2012 & \$ 720 & \$ 600 \
\hline
\end{array}$ 
Prices in $billions 
a.What is the GDP deflator for the three years?
b.Which is growing faster: nominal GDP or real GDP?

Accepted Answer

a.What is the GDP deflator for

Question 8

Suppose that the prices of imported consumption goods rose from the base year.Which is the most accurate statement about the CPI and the GDP deflator?

Accepted Answer

A) The GDP deflator rises but the CPI doesn't change 
B) The CPI rises but the GDP deflator doesn't change 
C) Both the GDP deflator and the CPI rise 
D) Both the GDP deflator and the CPI don't change 
A) The GDP deflator rises but the CPI doesn't change 
B) The CPI rises but the GDP deflator doesn't change 
C) Both the GDP deflator and the CPI rise 
D) Both the GDP deflator and the CPI don't change

Question 9

If a borrower and lender agree to an interest rate on a loan when inflation is expected to be seven per cent and inflation turns out to be 10 per cent over the life of the loan, then the borrower _____ and the lender ______.

Accepted Answer

A) gains; gains 
B) gains; loses 
C) is not affected; gains 
D) loses; gains 
A) gains; gains 
B) gains; loses 
C) is not affected; gains 
D) loses; gains

Question 10

If the nominal interest rate is 10 per cent and the rate of inflation is 15 per cent, the real interest rate is:

Accepted Answer

A) five per cent 
B) 25 per cent 
C) minus five per cent 
D) 150 per cent 
A) five per cent 
B) 25 per cent 
C) minus five per cent 
D) 150 per cent

Question 11

When the price of oil rises, the GDP deflator rises by much more than does the CPI, since oil and oil products are a much larger share of consumer spending than they are of GDP.

Accepted Answer

A) True 
 B)False

Question 12

An important difference between the GDP deflator and the CPI is that:

Accepted Answer

A) the GDP deflator reflects the prices of all goods and services produced domestically, whereas the CPI reflects the prices of goods and services bought by consumers 
B) the GDP deflator reflects the prices of goods and services bought by producers, whereas the CPI reflects the prices of goods and services bought by consumers 
C) the GDP deflator reflects the prices of all goods and services produced by a nation's resources, whereas the CPI reflects the prices of goods and services bought by consumers 
D) the GDP deflator reflects the prices of goods and services bought by producers and consumers, whereas the CPI reflects the prices of goods and services bought by consumers 
A) the GDP deflator reflects the prices of all goods and services produced domestically, whereas the CPI reflects the prices of goods and services bought by consumers 
B) the GDP deflator reflects the prices of goods and services bought by producers, whereas the CPI reflects the prices of goods and services bought by consumers 
C) the GDP deflator reflects the prices of all goods and services produced by a nation's resources, whereas the CPI reflects the prices of goods and services bought by consumers 
D) the GDP deflator reflects the prices of goods and services bought by producers and consumers, whereas the CPI reflects the prices of goods and services bought by consumers

Question 13

The producer price index measures:

Accepted Answer

A) the cost of a basket of goods and services sold by producers 
B) the cost of a basket of goods and services bought by firms 
C) the cost of a basket of goods and services typical of those produced in the economy 
D) the cost of a basket of goods and services produced for a typical consumer 
A) the cost of a basket of goods and services sold by producers 
B) the cost of a basket of goods and services bought by firms 
C) the cost of a basket of goods and services typical of those produced in the economy 
D) the cost of a basket of goods and services produced for a typical consumer

Question 14

Indexation is only used in the payment of transfers.

Accepted Answer

A) True 
 B)False

Question 15

A Korean company produces biscuits in Australia and exports all of them to Russia.If the price of the biscuits increases, then:

Accepted Answer

A) the GDP deflator and the CPI both increase 
B) the GDP deflator increases and the CPI is unchanged 
C) the GDP deflator is unchanged and the CPI increases 
D) the GDP deflator and the CPI are unchanged 
A) the GDP deflator and the CPI both increase 
B) the GDP deflator increases and the CPI is unchanged 
C) the GDP deflator is unchanged and the CPI increases 
D) the GDP deflator and the CPI are unchanged

Question 16

When inflation is high, lenders will charge a high nominal interest rate.

Accepted Answer

A) True 
 B)False

Question 17

Dick N.buys a house in 1973 and finances it with a mortgage that carries an annual interest rate of seven per cent.Inflation in 1973 is three per cent, inflation in 1974 is four per cent, and inflation in 1975 is five per cent.What is the real interest rate Dick pays on his mortgage in 1974?

Accepted Answer

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

Question 18

Why do economists believe that the CPI overstates inflation?

Accepted Answer

By using fixed weights that do

Question 19

When Gustav came to Australia in 1950, he took a job in a steel mill at $10 per day.If the price index was 30 in 1950 and 120 in 1990, Gustav's 1950 wage in 1990 dollars was $120 per day.

Accepted Answer

A) True 
 B)False

Question 20

The interest rate a bank pays is the nominal interest rate, and the interest rate adjusted for inflation is the real interest rate.

Accepted Answer

A) True 
 B)False

Exam 25: Measuring the Cost of Living

If workers and employers expecting three per cent inflation agree to a three-year wage contract, and inflation turns out to be five per cent, then:

Masako buys a house in 1999.She obtains a mortgage that carries an annual interest rate of 12 per cent, and makes payments of $880 per month.The CPI in 1999 is 100, in 2000 it is 110, and in 2001 it is 120.What is the inflation rate in 2001?

The substitution bias refers to choices consumers make between the categories of goods that form the basis for the CPI calculation.

The CPI is a perfect measure of the cost of living.

The basket of goods has remained the same since 2000, as common consumer preferences have tended to stay constant.

Which change in the price index shows the greatest rate of inflation: 100 to 110, 150 to 165, or 180 to 198?

Table 1 shows the following amounts for the years 2010 to 2012. Year Nominal GDP Real GDP 2010 \ 500 \ 500 2011 \ 600 \ 545.5 2012 \ 720 \ 600 Prices in $billions a.What is the GDP deflator for the three years? b.Which is growing faster: nominal GDP or real GDP?

Suppose that the prices of imported consumption goods rose from the base year.Which is the most accurate statement about the CPI and the GDP deflator?

If a borrower and lender agree to an interest rate on a loan when inflation is expected to be seven per cent and inflation turns out to be 10 per cent over the life of the loan, then the borrower _____ and the lender ______.

If the nominal interest rate is 10 per cent and the rate of inflation is 15 per cent, the real interest rate is:

When the price of oil rises, the GDP deflator rises by much more than does the CPI, since oil and oil products are a much larger share of consumer spending than they are of GDP.

An important difference between the GDP deflator and the CPI is that:

The producer price index measures:

Indexation is only used in the payment of transfers.

A Korean company produces biscuits in Australia and exports all of them to Russia.If the price of the biscuits increases, then:

When inflation is high, lenders will charge a high nominal interest rate.

Dick N.buys a house in 1973 and finances it with a mortgage that carries an annual interest rate of seven per cent.Inflation in 1973 is three per cent, inflation in 1974 is four per cent, and inflation in 1975 is five per cent.What is the real interest rate Dick pays on his mortgage in 1974?

Why do economists believe that the CPI overstates inflation?

When Gustav came to Australia in 1950, he took a job in a steel mill at $10 per day.If the price index was 30 in 1950 and 120 in 1990, Gustav's 1950 wage in 1990 dollars was $120 per day.

The interest rate a bank pays is the nominal interest rate, and the interest rate adjusted for inflation is the real interest rate.

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 a borrower and lender agree to an interest rate on a loan when inflation is expected to be seven per cent and inflation turns out to be 10 per cent over the life of the loan, then the borrower _ and the lender __.