Question 1

The CPI is a measure of the:

Accepted Answer

A) real wage. 
B) price of a specific good or service. 
C) rate of inflation. 
D) average level of prices relative to prices in the base year. 
A) real wage. 
B) price of a specific good or service. 
C) rate of inflation. 
D) average level of prices relative to prices in the base year.

Question 2

If workers and employers agree to a three-year wage contract under the expectation of 3 percent inflation, and inflation turns out to be 5 percent, 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 3

When statisticians fail to allow for the possibility that consumers switch from products with rising prices to those whose prices are stable or falling, the CPI will tend to ________ the rate of inflation.

Accepted Answer

A) understate 
B) precisely measure 
C) be unrelated to 
D) overstate 
A) understate 
B) precisely measure 
C) be unrelated to 
D) overstate

Question 4

The annual increase in the dollar value of a financial asset is called the:

Accepted Answer

A) real rate of return. 
B) inflation rate. 
C) real interest rate. 
D) nominal interest rate. 
A) real rate of return. 
B) inflation rate. 
C) real interest rate. 
D) nominal interest rate.

Question 5

The CPI equals 1.00 in year one and 1.05 in year two. If the nominal wage is $15 in year one and a contract calls for the wage to be indexed to the CPI, what will be the nominal wage in year two?

Accepted Answer

A) $14.29 
B) $15.00 
C) $15.75 
D) $16.05 
A) $14.29 
B) $15.00 
C) $15.75 
D) $16.05

Question 6

Suppose manufacturers introduce a new model car to replace a car currently included in the CPI basket. The price of the new car is 10 percent higher than the discontinued model, but the new car has additional safety features and amenities. In this situation the CPI will tend to ________ inflation as a result of ________ bias.

Accepted Answer

A) overstate; substitution 
B) understate; quality adjustment 
C) accurately measure; substitution 
D) overstate; quality adjustment 
A) overstate; substitution 
B) understate; quality adjustment 
C) accurately measure; substitution 
D) overstate; quality adjustment

Question 7

To ensure that your salary maintains its real purchasing power from year to year, your nominal salary must be:

Accepted Answer

A) deflated. 
B) indexed. 
C) aggregated. 
D) hyperinflated. 
A) deflated. 
B) indexed. 
C) aggregated. 
D) hyperinflated.

Question 8

One family earned an income of $28,000 in 1995. Over the next five years, their income increased by 15 percent, while the CPI increased by 15 percent. After five years, this family's nominal income ________, and their real income ________.

Accepted Answer

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

Question 9

Suppose that the total expenditures for a typical household in 2015 equaled $5,500 per month, while the cost of purchasing exactly the same items in 2017 was $6,875. If 2015 is the base year, the CPI for the year 2017 equals:

Accepted Answer

A) 0.80 
B) 1.00 
C) 1.20 
D) 1.25 
A) 0.80 
B) 1.00 
C) 1.20 
D) 1.25

Question 10

If the annual real interest rate on a 10-year inflation-protected bond equals 1.5 percent and the annual nominal rate of return on a 10-year bond without inflation protection is 4.2 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) 1.5 percent 
B) 2.7 percent 
C) 4.2 percent 
D) 5.7 percent 
A) 1.5 percent 
B) 2.7 percent 
C) 4.2 percent 
D) 5.7 percent

Question 11

A measurement in terms of current dollar value is called a(n)________ quantity.

Accepted Answer

A) nominal 
B) real 
C) deflated 
D) indexed 
A) nominal 
B) real 
C) deflated 
D) indexed

Question 12

When statisticians fail to take into account improvements in the quality of goods and services, the CPI will tend to ________ the rate of inflation.

Accepted Answer

A) understate 
B) precisely measure 
C) be unrelated to 
D) overstate 
A) understate 
B) precisely measure 
C) be unrelated to 
D) overstate

Question 13

Suppose that the price of chicken rises sharply compared to the price of turkey. In response, consumers buy more turkey and less chicken than they did in the CPI base year. In this situation the CPI will tend to ________ inflation as a result of ________ bias.

Accepted Answer

A) overstate; substitution 
B) understate; substitution 
C) accurately measure; substitution 
D) overstate; quality adjustment 
A) overstate; substitution 
B) understate; substitution 
C) accurately measure; substitution 
D) overstate; quality adjustment

Question 14

The practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index is called:

Accepted Answer

A) a substitution bias. 
B) the Fisher effect. 
C) deflating. 
D) indexing. 
A) a substitution bias. 
B) the Fisher effect. 
C) deflating. 
D) indexing.

Question 15

The nominal return on an inflation-protected bond equals a fixed real return:

Accepted Answer

A) plus the actual rate of inflation. 
B) minus the actual rate of inflation. 
C) divided by the price level. 
D) plus the expected rate of inflation. 
A) plus the actual rate of inflation. 
B) minus the actual rate of inflation. 
C) divided by the price level. 
D) plus the expected rate of inflation.

Question 16

The price of a gallon of gasoline at the pump increased by 10 percent at the same time that the inflation rate was 15 percent. The nominal price of gasoline ________, and the real price of gasoline ________.

Accepted Answer

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

Question 17

The process of dividing a nominal quantity by a price index in order to express the quantity in real terms is called:

Accepted Answer

A) deflating. 
B) negative inflation. 
C) indexing. 
D) depressing. 
A) deflating. 
B) negative inflation. 
C) indexing. 
D) depressing.

Question 18

On January 1, 2008, Edward invested $10,000 at 5 percent interest for one year. The CPI on January 1, 2008 stood at 1.60. On January 1, 2009, the CPI was 1.76. The real rate of interest earned by Edward was ________ percent.

Accepted Answer

A) -5 
B) 0 
C) 5 
D) 10 
A) -5 
B) 0 
C) 5 
D) 10

Question 19

If you wish to maintain a constant purchasing power when you retire, you should choose retirement income options that are:

Accepted Answer

A) deflated. 
B) nominal. 
C) indexed. 
D) inflated. 
A) deflated. 
B) nominal. 
C) indexed. 
D) inflated.

Question 20

The typical family on the Planet Econ consumes 10 pizzas, 7 pairs of jeans, and 20 gallons of milk. In 2016, pizzas cost $10 each, jeans cost $40 per pair, and milk cost $3 per gallon. In 2017, the price of pizzas went down to $8 each, while the prices of jeans and milk remained the same. Between 2016 and 2017, a typical family's cost of living:

Accepted Answer

A) increased by 4.5 percent. 
B) decreased by 4.5 percent. 
C) remained the same. 
D) decreased by 20 percent. 
A) increased by 4.5 percent. 
B) decreased by 4.5 percent. 
C) remained the same. 
D) decreased by 20 percent.

Exam 18: Measuring the Price Level and Inflation

The CPI is a measure of the:

If workers and employers agree to a three-year wage contract under the expectation of 3 percent inflation, and inflation turns out to be 5 percent, then:

When statisticians fail to allow for the possibility that consumers switch from products with rising prices to those whose prices are stable or falling, the CPI will tend to ________ the rate of inflation.

The annual increase in the dollar value of a financial asset is called the:

The CPI equals 1.00 in year one and 1.05 in year two. If the nominal wage is $15 in year one and a contract calls for the wage to be indexed to the CPI, what will be the nominal wage in year two?

To ensure that your salary maintains its real purchasing power from year to year, your nominal salary must be:

One family earned an income of $28,000 in 1995. Over the next five years, their income increased by 15 percent, while the CPI increased by 15 percent. After five years, this family's nominal income ________, and their real income ________.

Suppose that the total expenditures for a typical household in 2015 equaled $5,500 per month, while the cost of purchasing exactly the same items in 2017 was $6,875. If 2015 is the base year, the CPI for the year 2017 equals:

A measurement in terms of current dollar value is called a(n)________ quantity.

When statisticians fail to take into account improvements in the quality of goods and services, the CPI will tend to ________ the rate of inflation.

Suppose that the price of chicken rises sharply compared to the price of turkey. In response, consumers buy more turkey and less chicken than they did in the CPI base year. In this situation the CPI will tend to ________ inflation as a result of ________ bias.

The practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index is called:

The nominal return on an inflation-protected bond equals a fixed real return:

The price of a gallon of gasoline at the pump increased by 10 percent at the same time that the inflation rate was 15 percent. The nominal price of gasoline ________, and the real price of gasoline ________.

The process of dividing a nominal quantity by a price index in order to express the quantity in real terms is called:

On January 1, 2008, Edward invested $10,000 at 5 percent interest for one year. The CPI on January 1, 2008 stood at 1.60. On January 1, 2009, the CPI was 1.76. The real rate of interest earned by Edward was ________ percent.

If you wish to maintain a constant purchasing power when you retire, you should choose retirement income options that are:

Thinking Like an Economist

Comparative Advantage

Supply and Demand

Elasticity

Demand

Perfectly Competitive Supply

Efficiency, Exchange, and the Invisible Hand in Action

Monopoly, Oligopoly, and Monopolistic Competition

Games and Strategic Behavior

An Introduction to Behavioral Economics

Externalities, Property Rights, and the Environment

The Economics of Information

Labor Markets, Poverty, and Income Distribution

Public Goods and Tax Policy

International Trade and Trade Policy

Macroeconomics: The Birds Eye View of the Economy

Measuring Economic Activity: GDP and Unemployment

Economic Growth, Productivity, and Living Standards

The Labor Market: Workers, Wages, and Unemployment

Saving and Capital Formation

Money Prices and the Federal Reserve

Financial Markets and International Capital Flows

Short-Term Economic Fluctuations: An Introduction

Spending and Output in the Short Run

Stabilizing the Economy: The Role of the Fed

Aggregate Demand, Aggregate Supply, and Inflation

Exchange Rates and the Open Economy

Filters

One family earned an income of $28,000 in 1995. Over the next five years, their income increased by 15 percent, while the CPI increased by 15 percent. After five years, this family's nominal income , and their real income .

Suppose that the price of chicken rises sharply compared to the price of turkey. In response, consumers buy more turkey and less chicken than they did in the CPI base year. In this situation the CPI will tend to inflation as a result of bias.

The price of a gallon of gasoline at the pump increased by 10 percent at the same time that the inflation rate was 15 percent. The nominal price of gasoline , and the real price of gasoline .