Question 1

Suppose that the total expenditures for a typical household in 2015 equaled $2,500 per month, while the cost of purchasing exactly the same items in 2017 was $3,000. If 2015 is the base year, the CPI for 2017 equals:

Accepted Answer

A) 0.83 
B) 1.00 
C) 1.20 
D) 1.25

Question 2

When inflation turns out to be different from what was expected, purchasing power is ________.

Accepted Answer

A) destroyed 
B) redistributed 
C) increased 
D) decreased

Question 3

On January 1, 2015, Anna invested $5,000 at 5 percent interest for one year. The CPI on January 1, 2015 stood at 2.37. On January 1, 2016, the CPI was 2.40. The real rate of interest earned by Anna was ________ percent.

Accepted Answer

A) -5 
B) 3.7 
C) 5 
D) 9

Question 4

Because the minimum wage is not indexed to inflation, when there is inflation the nominal minimum wage ________, and the real minimum wage ________.

Accepted Answer

A) remains constant; decreases 
B) remains constant; remains constant 
C) decreases; remains constant 
D) increases; decreases

Question 5

The process of converting current dollar values into real terms is called ________, while the process of adjusting nominal quantities to maintain their purchasing power is called ________.

Accepted Answer

A) deflation; inflation 
B) inflation; hyperinflation 
C) deflating; indexing 
D) indexing; deflating

Question 6

Deflation is a situation in which the:

Accepted Answer

A) quantity of goods and services produced is increasing over time. 
B) quantity of goods and services produced is decreasing over time. 
C) prices of most goods and services are falling over time. 
D) prices of most goods and services are rising over time.

Question 7

If the annual real rate on a 10-year inflation-protected bond equals 1.9 percent and the annual nominal rate of return on a 10-year bond without inflation protection is 4.4 percent, what average rate of inflation over the ten years would make holders of inflation-protected bonds and holders of bonds without inflation protection equally well off?

Accepted Answer

A) 1.9 percent 
B) 2.5 percent 
C) 4.4 percent 
D) 6.3 percent

Question 8

A relative price is:

Accepted Answer

A) the rate of inflation. 
B) a measure of overall prices at a particular point in time. 
C) the percentage change in a price index such as the CPI. 
D) the price of a specific good in comparison to the prices of other goods and services.

Question 9

The price of a gallon of gasoline at the pump increased by 10 percent at the same time that the inflation rate was 5 percent. The nominal price of gasoline ________, and the real price of gasoline ________.

Accepted Answer

A) increased; increased 
B) increased; decreased 
C) increased; did not change 
D) decreased; increased

Question 10

The consumer price index for Planet Econ consists of only two items: books and hamburgers. In 2015, the base year, the typical consumer purchased 10 books for $20 each and 200 hamburgers for $1 each. In 2017, the typical consumer purchased 12 books for $23 each and 300 hamburgers for $1.15 each. The consumer price index for 2017 on Planet Econ equals:

Accepted Answer

A) 1.00 
B) 1.15 
C) 1.25 
D) 1.45

Question 11

The price of a gallon of gasoline at the pump increased by 5 percent at the same time that the inflation rate was also 5 percent. The nominal price of gasoline ________, and the real price of gasoline ________.

Accepted Answer

A) did not change; increased 
B) did not change; did not change 
C) increased; did not change 
D) increased; decreased

Question 12

Suppose a borrower and lender agree to an interest rate on a loan when inflation is expected to be 6 percent. The borrower would benefit the most if which of the following inflation rates actually occurred?

Accepted Answer

A) 0 percent 
B) 3 percent 
C) 6 percent 
D) 9 percent

Question 13

If both the lender and borrower agree on an 8 percent interest rate, both expect a 4 percent inflation rate, and inflation turns out to be 4 percent, then ________ by the inflation.

Accepted Answer

A) the borrower is hurt and the lender gains 
B) the borrower gains and the lender is hurt 
C) neither the borrower nor the lender are hurt 
D) both the borrower and lender are hurt

Question 14

Suppose that the total expenditures for a typical household in 2015 equaled $2,500 per month, while the cost of purchasing exactly the same items in 2017 was $3,000. If 2015 is the base year, the CPI for 2015 equals:

Accepted Answer

A) 0.83 
B) 1.00 
C) 1.20 
D) 1.25

Question 15

The market interest rate in Alpha is 7 percent, and the market interest rate in Beta is 10 percent; the inflation rate in Alpha is 3 percent, and inflation rate in Beta is 8 percent. Which of the following statements is true?

Accepted Answer

A) The real interest rate is higher in Alpha, but the nominal interest rate is higher in Beta. 
B) The real interest rate is higher in Beta, but the nominal interest rate is higher in Alpha. 
C) Both the real and nominal interest rates are higher in Alpha. 
D) Both the real and nominal interest rates are higher in Beta.

Question 16

Assume one investor bought a 10-year inflation-protected bond with a fixed annual real rate of 1.5 percent and another investor bought a 10-year bond without inflation protection with a nominal annual return of 4.2 percent. If inflation over the 10-year period averaged 2 percent, which investor earned a higher real return?

Accepted Answer

A) The investor who purchased the inflation protected bond. 
B) The investor who purchased the bond without inflation protection. 
C) Both investors earned the same real return. 
D) Neither investor earned a positive real return.

Question 17

The wage paid to workers measured in terms of real purchasing power is called the:

Accepted Answer

A) nominal wage. 
B) cost of living. 
C) minimum wage. 
D) real wage.

Question 18

A consumer expenditure survey reports the following information on consumer protein spending:  
 Using 2016 as the base year, by how much does a "cost of protein" index increase between 2016 and 2017?

Accepted Answer

A) 5.2 percent 
B) 8.6 percent 
C) 13.4 percent 
D) 14.3 percent

Question 19

The nominal interest rate equals the:

Accepted Answer

A) real interest rate minus the inflation rate. 
B) real interest rate plus the inflation rate. 
C) real interest rate divided by the inflation rate. 
D) inflation rate minus the real interest rate.

Question 20

The CPI in 1930 equaled 0.17. The CPI in 1931 equaled 0.15. The rate of inflation between 1930 and 1931 was ________ percent.

Accepted Answer

A) -13.3 
B) -11.8 
C) 1.5 
D) 11.8

Exam 18: Measuring the Price Level and Inflation

Suppose that the total expenditures for a typical household in 2015 equaled $2,500 per month, while the cost of purchasing exactly the same items in 2017 was $3,000. If 2015 is the base year, the CPI for 2017 equals:

When inflation turns out to be different from what was expected, purchasing power is ________.

On January 1, 2015, Anna invested $5,000 at 5 percent interest for one year. The CPI on January 1, 2015 stood at 2.37. On January 1, 2016, the CPI was 2.40. The real rate of interest earned by Anna was ________ percent.

Because the minimum wage is not indexed to inflation, when there is inflation the nominal minimum wage , and the real minimum wage .

The process of converting current dollar values into real terms is called , while the process of adjusting nominal quantities to maintain their purchasing power is called .