Question 1

A CPI that equals 1.34 in 2016 (when 2010 is the base year)means that:

Accepted Answer

A) prices in 2016 are 34 percent higher than in 2015. 
B) the CPI equals $1.34 in 2016. 
C) the inflation rate in 2016 is 134 percent. 
D) the average level of prices is 34 percent higher in 2016 than in the base year.

Question 2

Suppose the value of the CPI is 1.100 in year one, 1.122 in year two, and 1.133 in year three. Assume also that the price of computers increases by 3 percent between year one and year two, and by another 3 percent 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) decreasing; increasing 
B) increasing; increasing 
C) decreasing; decreasing 
D) increasing; decreasing

Question 3

The price level 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 4

If the bank agrees to make a loan at a 7 percent interest rate and the inflation rate is 3 percent, then 4 percent is the ________ rate.

Accepted Answer

A) nominal interest 
B) real interest 
C) hyperinflation 
D) disinflation

Question 5

Suppose the value of the CPI is 1.100 in year one, 1.160 in year two, and 1.270 in year three. Assume also that the price of computers increases by 3 percent between year one and year two, and by another 3 percent 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

Question 6

The ________ is the rate of change of the ________.

Accepted Answer

A) base year price index; current year price index 
B) current year price index; base year price index 
C) CPI; rate of inflation 
D) rate of inflation; CPI

Question 7

Inflation is a measure of the ________ of prices; the CPI is a measure of the ________ of prices.

Accepted Answer

A) current level; rate of change in the level 
B) rate of change in the level; current level 
C) index; base year's level 
D) base year's level; index

Question 8

The CPI in year one equaled 1.45. The CPI in year two equaled 1.51. The rate of inflation between years one and two was ________ percent.

Accepted Answer

A) 4.0 
B) 4.1 
C) 4.5 
D) 6.0

Question 9

To counteract relative price changes, the government would implement:

Accepted Answer

A) monetary policy. 
B) fiscal policy. 
C) polices that affect the supply and demand for a specific good. 
D) policies that affect the supply and demand for all goods and services.

Question 10

All of the following are real quantities except the:

Accepted Answer

A) number of new cars produced in one year. 
B) tons of steel shipped to South America. 
C) millions of computer chips shipped to computer makers. 
D) billions of dollars invested in stocks.

Question 11

The real rate of return on holding cash ________ inflation is correctly anticipated.

Accepted Answer

A) is higher when 
B) is lower when 
C) does not depend on whether 
D) equals the nominal interest rate when

Question 12

The consumer price index for the current year measures the cost of a standard basket in the ________ year relative to the cost of the same basket in the ________ year.

Accepted Answer

A) current; base 
B) current; current 
C) base; index 
D) base; current

Question 13

A quantity measured in physical terms is called a ________ quantity.

Accepted Answer

A) nominal 
B) relative 
C) real 
D) current

Question 14

Making more frequent, but smaller cash withdrawals from banks ________ the inflation losses from holding cash and ________ the shoe leather costs of inflation.

Accepted Answer

A) increases; increases 
B) increases; reduces 
C) reduces; has no impact on 
D) reduces; increases

Question 15

A year's tuition at a state university cost $250 in 1972 when the CPI equaled 0.418. The cost of a year's tuition at the same state university cost $8,000 in 2016 when the CPI equaled 2.40. The real cost of tuition between 1972 and 2016:

Accepted Answer

A) increased. 
B) decreased. 
C) remained constant. 
D) may have either increased or decreased.

Question 16

The inflation rate can be calculated as the percentage change in:

Accepted Answer

A) real GDP. 
B) nominal GDP. 
C) the CPI. 
D) the exchange rate.

Question 17

An investor purchasing an inflation-protected bond with a fixed annual real return of 1.75 percent will earn a nominal annual return of ________ percent if the actual inflation rate turns out to be 3.25 percent.

Accepted Answer

A) 1.50 percent 
B) 1.86 percent 
C) 5.00 percent 
D) 5.69 percent

Question 18

A report indicated that the average real wage in manufacturing declined by 2 percent between 1990 and 2000. If the CPI equaled 1.30 in 1990, 1.69 in 2000, and the average nominal wage in manufacturing was $35 in 2000, what was the average nominal wage in manufacturing in 1990?

Accepted Answer

A) $21.13 
B) $26.40 
C) $26.92 
D) $27.47

Question 19

If workers received a 5 percent wage increase and the rate of inflation was 5 percent, then their real wage:

Accepted Answer

A) increased. 
B) decreased. 
C) remained constant. 
D) equaled the nominal wage.

Question 20

If all prices, including the price of beef, increase by 3 percent, then the relative price of beef has ________ and inflation ________.

Accepted Answer

A) increased; has occurred 
B) increased; has not occurred 
C) remained constant; has occurred 
D) remained constant; has not occurred

Exam 18: Measuring the Price Level and Inflation

A CPI that equals 1.34 in 2016 (when 2010 is the base year) means that: