Question 1

If the nominal interest rate is 4 percent and the real interest rate is 7 percent, then the inflation rate is

Accepted Answer

A)   -3 percent.
B)   0.75 percent.
C)   3 percent.
D)   11 percent.E) A) and B)
F) None of the above

Question 2

Suppose you know the value of the consumer price index (CPI)  in year 2 as well as the inflation rate in year 2. Which of the following equations is valid for the CPI in year 1?

Accepted Answer

A)   CPI in year 1 =
B)   CPI in year 1 =
C)   CPI in year 1 =
D)   CPI in year 1 =E) B) and D)
F) A) and B)

Question 3

When consumer spending is broken down into the major categories of goods and services, the largest single category is spending on transportation.

Accepted Answer

A) True 
 B)False

Question 4

In a period of inflation real interest rates will be greater than nominal interest rates.

Accepted Answer

A) True 
 B)False

Question 5

In 1979 and 1980,

Accepted Answer

A)   the U.S. inflation rate as measured by the GDP deflator was higher than that measured by the CPI, and the difference was explained by rapidly rising prices of goods exported by the U.S.
B)   the U.S. inflation rate as measured by the CPI was higher than that measured by the GDP deflator, and the difference was explained by rapidly rising prices of goods exported by the U.S.
C)   the U.S. inflation rate as measured by the GDP deflator was higher than that measured by the CPI, and the difference was explained by rapidly rising oil prices.
D)   the U.S. inflation rate as measured by the CPI was higher than that measured by the GDP deflator, and the difference was explained by rapidly rising oil prices.E) C) and D)
F) B) and D)

Question 6

Two alternative measures of the overall level of prices are

Accepted Answer

A)   the inflation rate and the consumer price index.
B)   the inflation rate and the GDP deflator.
C)   the GDP deflator and the consumer price index.
D)   the cost of living index and nominal GDP.E) None of the above
F) B) and C)

Question 7

Suppose that over the past year, the real interest rate was 5 percent and the inflation rate was 3 percent. It follows that

Accepted Answer

A)   the dollar value of savings increased at 5 percent, and the purchasing power of savings increased at 2 percent.
B)   the dollar value of savings increased at 5 percent, and the purchasing power of savings increased at 8 percent.
C)   the dollar value of savings increased at 8 percent, and the purchasing power of savings increased at 2 percent.
D)   the dollar value of savings increased at 8 percent, and the purchasing power of savings increased at 5 percent.E) A) and D)
F) A) and B)

Question 8

Which of the following statements is correct about the relationship between inflation and interest rates?

Accepted Answer

A)   There is no relationship between inflation and interest rates.
B)   The interest rate is determined by the rate of inflation.
C)   In order to fully understand inflation, we need to know how to correct for the effects of interest rates.
D)   In order to fully understand interest rates, we need to know how to correct for the effects of inflation.E) B) and D)
F) All of the above

Question 9

The Bureau of Labor Statistics surveys consumers to determine a fixed basket of goods.

Accepted Answer

A) True 
 B)False

Question 10

With respect to the consumer price index, which of the following serves as an example of how the substitution bias arises? Between 2010 and 2011, the price of a pound of peanuts

Accepted Answer

A)   rises from $0.80 to $1.00 while the price of a loaf of bread rises from $2.00 to $2.50.
B)   falls from $0.90 to $0.72 while the price of a loaf of bread falls from $2.00 to $1.60.
C)   remains constant, as does the price of a loaf of bread.
D)   None of the above serves as an example of how the substitution bias arises.E) A) and B)
F) A) and C)

Question 11

Substitution bias occurs because the CPI ignores the possibility of consumer substitution toward goods that have become relatively less expensive.

Accepted Answer

A) True 
 B)False

Question 12

When the quality of a good improves while its price remains the same, the purchasing power of the dollar

Accepted Answer

A)   increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
B)   increases, so the CPI understates the change in the cost of living if the quality change is not accounted for.
C)   decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
D)   decreases, so the CPI understates the change in the cost of living if the quality change is not accounted for.E) None of the above
F) B) and C)

Question 13

In general, if a consumer good is produced domestically and consumed domestically, a decrease in its price will have which of the following effects?

Accepted Answer

A)   The consumer price index will decrease relatively more than will the GDP deflator.
B)   The consumer price index and the GDP deflator will decrease by the same amount.
C)   The consumer price index will decrease relatively less than will the GDP deflator.
D)   One cannot generalize about the decrease in the consumer price index relative to the decrease in the GDP deflator.E) B) and D)
F) A) and B)

Question 14

Table 6-4
The table below pertains to Wrexington, an economy in which the typical consumer's basket consists of 20 pounds of meat and 10 toys.
 
-Refer to Table 6-4. If the base year is 2006, then the CPI

Accepted Answer

A)   increased from 2004 to 2005 and increased from 2005 to 2006.
B)   increased from 2004 to 2005 and decreased from 2005 to 2006.
C)   decreased from 2004 to 2005 and increased from 2005 to 2006.
D)   decreased from 2004 to 2005 and decreased from 2005 to 2006.E) None of the above
F) All of the above

Question 15

If the CPI today is 120 and the CPI five years ago was 80, then something that cost $1 five years ago would cost $1.50 in today's prices.

Accepted Answer

A) True 
 B)False

Question 16

Suppose a basket of goods and services has been selected to calculate the CPI and 2004 has been selected as the base year. In 2002, the basket's cost was $50; in 2004, the basket's cost was $52; and in 2006, the basket's cost was $54.60. The value of the CPI in 2006 was

Accepted Answer

A)   91.6.
B)   95.2.
C)   105.0.
D)   109.2.E) A) and B)
F) C) and D)

Question 17

For any given year, the CPI is the price of the basket of goods and services in the

Accepted Answer

A)   given year divided by the price of the basket in the base year, then multiplied by 100.
B)   given year divided by the price of the basket in the previous year, then multiplied by 100.
C)   base year divided by the price of the basket in the given year, then multiplied by 100.
D)   previous year divided by the price of the basket in the given year, then multiplied by 100.E) C) and D)
F) B) and C)

Question 18

The nominal interest rate tells you how fast the number of dollars in your bank account rises over time.

Accepted Answer

A) True 
 B)False

Question 19

With respect to the consumer price index, the substitution bias arises because

Accepted Answer

A)   prices of goods and services do not change in the same proportion from year to year.
B)   consumers are slow to adjust their buying patterns from year to year in response to price changes.
C)   consumers are eager to buy new products as they are introduced, despite their lack of full information about the quality of those products until they buy and use them.
D)   All of the above are correct.E) None of the above
F) All of the above

Question 20

The primary purpose of measuring the overall level of prices in the economy is to

Accepted Answer

A)   allow for the measurement of GDP.
B)   allow consumers to know what kinds of prices to expect in the future.
C)   allow for the comparison of dollar figures from different points in time.
D)   allow for the comparison of dollar figures from the same point in time.E) None of the above
F) B) and D)

Exam 6: Measuring the Cost of Living

The primary purpose of measuring the overall level of prices in the economy is to

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When consumer spending is broken down into the major categories of goods and services, the largest single category is spending on transportation.

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In general, if a consumer good is produced domestically and consumed domestically, a decrease in its price will have which of the following effects?

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Suppose you know the value of the consumer price index (CPI) in year 2 as well as the inflation rate in year 2. Which of the following equations is valid for the CPI in year 1?

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If the nominal interest rate is 4 percent and the real interest rate is 7 percent, then the inflation rate is

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Suppose that over the past year, the real interest rate was 5 percent and the inflation rate was 3 percent. It follows that

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In a period of inflation real interest rates will be greater than nominal interest rates.

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With respect to the consumer price index, the substitution bias arises because

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If the CPI today is 120 and the CPI five years ago was 80, then something that cost $1 five years ago would cost $1.50 in today's prices.

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Table 6-4 The table below pertains to Wrexington, an economy in which the typical consumer's basket consists of 20 pounds of meat and 10 toys. -Refer to Table 6-4. If the base year is 2006, then the CPI

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Suppose a basket of goods and services has been selected to calculate the CPI and 2004 has been selected as the base year. In 2002, the basket's cost was $50; in 2004, the basket's cost was $52; and in 2006, the basket's cost was $54.60. The value of the CPI in 2006 was

Correct AnswerverifiedShow Answer

In 1979 and 1980,

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When the quality of a good improves while its price remains the same, the purchasing power of the dollar

Correct AnswerverifiedShow Answer

Two alternative measures of the overall level of prices are

Correct AnswerverifiedShow Answer

For any given year, the CPI is the price of the basket of goods and services in the

Correct AnswerverifiedShow Answer

With respect to the consumer price index, which of the following serves as an example of how the substitution bias arises? Between 2010 and 2011, the price of a pound of peanuts

Correct AnswerverifiedShow Answer

Substitution bias occurs because the CPI ignores the possibility of consumer substitution toward goods that have become relatively less expensive.

Correct AnswerverifiedShow Answer

The Bureau of Labor Statistics surveys consumers to determine a fixed basket of goods.

Correct AnswerverifiedShow Answer

Which of the following statements is correct about the relationship between inflation and interest rates?

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The nominal interest rate tells you how fast the number of dollars in your bank account rises over time.

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