Question 1

In Canada, if the price of imported oil rises so that the price of gasoline and heating oil rise, what happens to the GDP deflator and the consumer price index?

Accepted Answer

A) The GDP deflator rises much more than the consumer price index rises. 
B) The consumer price index rises much more than the GDP deflator rises. 
C) The GDP deflator and the consumer price index rise by about the same amount. 
D) The consumer price index rises slightly more than the GDP deflator rises. 
A) The GDP deflator rises much more than the consumer price index rises. 
B) The consumer price index rises much more than the GDP deflator rises. 
C) The GDP deflator and the consumer price index rise by about the same amount. 
D) The consumer price index rises slightly more than the GDP deflator rises. B

Question 2

Consumers begin purchasing houses incorporating steel studs instead of wooden studs after the price of lumber increases. Which of the following problems in the construction of the CPI does this situation best represent?

Accepted Answer

A) substitution bias 
B) introduction of new goods 
C) unmeasured quality change 
D) income bias 
A) substitution bias 
B) introduction of new goods 
C) unmeasured quality change 
D) income bias A

Question 3

Research done at the Bank of Canada suggests that the sources of bias in CPI, taken together, cause the Canadian CPI to overstate increases in the cost of living by about how much?

Accepted Answer

A) 3.4 percentage points 
B) 2.1 percentage points 
C) 1.6 percentage points 
D) 0.6 of a percentage point 
A) 3.4 percentage points 
B) 2.1 percentage points 
C) 1.6 percentage points 
D) 0.6 of a percentage point D

Question 4

Which of the following best describes the correlation between nominal and real interest rates?

Accepted Answer

A) Nominal and real interest rates usually move together. 
B) Nominal and real interest rates seldom move together. 
C) Nominal and real interest rates often do not move together. 
D) Nominal and real interest rates are identical. 
A) Nominal and real interest rates usually move together. 
B) Nominal and real interest rates seldom move together. 
C) Nominal and real interest rates often do not move together. 
D) Nominal and real interest rates are identical.

Question 5

Welfare payments are indexed for inflation using the CPI. A recent newspaper editorial claimed that welfare recipients are harmed by years of low inflation because they do not receive as large an increase in their payments as they do in years of high inflation. Is the newspaper editorial correct?

Accepted Answer

A) The newspaper editorial is correct. 
B) The newspaper editorial is correct if the market basket consumed by welfare recipients is the same as the market basket used to compute the CPI. 
C) The newspaper editorial is correct if the prices of the goods consumed by welfare recipients increase faster than the prices of the goods in the market basket used to compute the CPI. 
D) The newspaper editorial is correct if the prices of the goods consumed by welfare recipients increase slower than the prices of the goods in the market basket used to compute the CPI. 
A) The newspaper editorial is correct. 
B) The newspaper editorial is correct if the market basket consumed by welfare recipients is the same as the market basket used to compute the CPI. 
C) The newspaper editorial is correct if the prices of the goods consumed by welfare recipients increase faster than the prices of the goods in the market basket used to compute the CPI. 
D) The newspaper editorial is correct if the prices of the goods consumed by welfare recipients increase slower than the prices of the goods in the market basket used to compute the CPI.

Question 6

Samantha deposits $2000 into a saving account that pays an annual interest rate of 5 percent. Over the course of a year, the inflation rate is 2 percent. What happens at the end of the year?

Accepted Answer

A) Samantha has $100 more in her account, and her purchasing power has increased by about $40. 
B) Samantha has $100 more in her account, and her purchasing power has increased by about $60. 
C) Samantha has $140 more in her account, and her purchasing power has increased about $100. 
D) Samantha has $140 more in her account, and her purchasing power has increased about $40. 
A) Samantha has $100 more in her account, and her purchasing power has increased by about $40. 
B) Samantha has $100 more in her account, and her purchasing power has increased by about $60. 
C) Samantha has $140 more in her account, and her purchasing power has increased about $100. 
D) Samantha has $140 more in her account, and her purchasing power has increased about $40.

Question 7

Suppose an economy produces and consumes only two goods, houses and entertainment. The following table shows quantities consumed and prices for three years: Year 0 (the base year), Year 1, and Year 2.
   
a.Using the base year basket, compute the CPI for Year 1 and Year 2
b.Compute GDP deflator for Year 1 and Year 2
c.Compute inflation rates based on CPI and GDP deflator

Accepted Answer

a.CPI¹=(295x1000+25x700)/(280x1000+24x700

Question 8

From October 2009 to October 2010, the CPI in country A rose from 116.5 to 119.8. In country B, it rose from 97.2 to 102.3. What were the inflation rates in the two countries?

Accepted Answer

A) 3.3 percent in A and 6.7 percent in B 
B) 3.3 percent in A and 5.1 percent in B 
C) 2.8 percent in A and 6.7 percent in B 
D) 2.8 percent in A and 5.2 percent in B 
A) 3.3 percent in A and 6.7 percent in B 
B) 3.3 percent in A and 5.1 percent in B 
C) 2.8 percent in A and 6.7 percent in B 
D) 2.8 percent in A and 5.2 percent in B

Question 9

How do the CPI and the GDP deflator relate to each other?

Accepted Answer

A) They generally move together. 
B) They generally show different patterns of movement. 
C) They show identical changes. 
D) They show unrelated patterns of movement. 
A) They generally move together. 
B) They generally show different patterns of movement. 
C) They show identical changes. 
D) They show unrelated patterns of movement.

Question 10

Table 6-5
The table below pertains to an economy with only two goods-books and calculators. The fixed basket consists of 5 books and 10 calculators.
  
-Refer to Table 6-5. Using 2007 as the base year, what is the consumer price index?

Accepted Answer

A) 52.66 in 2005, 84.25 in 2006, and 106.5 in 2007 
B) 64.52 in 2005, 87.10 in 2006, and 100 in 2007 
C) 52.66 in 2005, 90.89 in 2006, and 100 in 2007 
D) 100 in 2005, 135 in 2006, and 155 in 2007 
A) 52.66 in 2005, 84.25 in 2006, and 106.5 in 2007 
B) 64.52 in 2005, 87.10 in 2006, and 100 in 2007 
C) 52.66 in 2005, 90.89 in 2006, and 100 in 2007 
D) 100 in 2005, 135 in 2006, and 155 in 2007

Question 11

Suppose the price of CD players increases dramatically, causing a 1 percent increase in the CPI. By how much will the GDP deflator most likely increase?

Accepted Answer

A) more than 1 percent 
B) less than 1 percent 
C) 1 percent 
D) It is impossible to make an informed guess without more information. 
A) more than 1 percent 
B) less than 1 percent 
C) 1 percent 
D) It is impossible to make an informed guess without more information.

Question 12

If the consumer price index was 100 in the base year and 107 the following year, what was the inflation rate?

Accepted Answer

A) 107 percent 
B) 10.7 percent 
C) 7 percent 
D) 0.7 percent 
A) 107 percent 
B) 10.7 percent 
C) 7 percent 
D) 0.7 percent

Question 13

The CPI is computed by finding the price of a market basket of goods whose contents vary each year.

Accepted Answer

A) True 
 B)False

Question 14

Suppose that in 2010, OPEC succeeds in raising world oil prices by 300 percent. This price increase causes inventors to look at alternative sources of fuel for internal-combustion engines. A hydrogen-powered engine is developed, and it is cheaper to operate than gasoline engines. Which of the following problems in the construction of the CPI would this situation represent?

Accepted Answer

A) substitution bias and introduction of new goods 
B) introduction of new goods and unmeasured quality change 
C) unmeasured quality change and new goods 
D) income bias and substitution bias 
A) substitution bias and introduction of new goods 
B) introduction of new goods and unmeasured quality change 
C) unmeasured quality change and new goods 
D) income bias and substitution bias

Question 15

From 2000 to 2001 the CPI for medical care rose from 260.8 to 272.8. What was the inflation rate for medical care?

Accepted Answer

A) 12 percent 
B) 11.1 percent 
C) 4.9 percent 
D) 4.6 percent 
A) 12 percent 
B) 11.1 percent 
C) 4.9 percent 
D) 4.6 percent

Question 16

The price index in the first year is 100, in the second year is 90, and in the third year is 80. What is the deflation rate between the first and second year, and between the second and third year?

Accepted Answer

A) 11 percent between the first and second year, 11 percent between the second and third year 
B) 11 percent between the first and second year, 12 percent between the second and third year 
C) 10 percent between the first and second year, 11 percent between the second and third year 
D) 10 percent between the first and second year, 12 percent between the second and third year 
A) 11 percent between the first and second year, 11 percent between the second and third year 
B) 11 percent between the first and second year, 12 percent between the second and third year 
C) 10 percent between the first and second year, 11 percent between the second and third year 
D) 10 percent between the first and second year, 12 percent between the second and third year

Question 17

Which of the following best describes nominal interest rates in the 1970s and 1990s?

Accepted Answer

A) high in the 70s and 90s 
B) low in the 70s and 90s 
C) high in the 70s and low in the 90s 
D) low in the 70s and high in the 90s 
A) high in the 70s and 90s 
B) low in the 70s and 90s 
C) high in the 70s and low in the 90s 
D) low in the 70s and high in the 90s

Question 18

When the quality of a good improves, what happens to the purchasing power of the dollar?

Accepted Answer

A) It increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for. 
B) It increases, so the CPI understates the change in the cost of living if the quality change is not accounted for. 
C) It decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted for. 
D) It decreases, so the CPI understates the change in the cost of living if the quality change is not accounted for. 
A) It increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for. 
B) It increases, so the CPI understates the change in the cost of living if the quality change is not accounted for. 
C) It decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted for. 
D) It decreases, so the CPI understates the change in the cost of living if the quality change is not accounted for.

Question 19

If there is a reduction in the price of large tractors imported into Canada from Russia, what happens to the GDP deflator and the consumer price index?

Accepted Answer

A) The GDP deflator will decrease, and the consumer price index will increase. 
B) The GDP deflator will increase, but the consumer price index will remain unchanged. 
C) Both the GDP deflator and the consumer price index will increase. 
D) Neither the GDP deflator nor the consumer price index will increase. 
A) The GDP deflator will decrease, and the consumer price index will increase. 
B) The GDP deflator will increase, but the consumer price index will remain unchanged. 
C) Both the GDP deflator and the consumer price index will increase. 
D) Neither the GDP deflator nor the consumer price index will increase.

Question 20

When the quality of a good deteriorates, what happens to the purchasing power of the dollar?

Accepted Answer

A) It increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for. 
B) It increases, so the CPI understates the change in the cost of living if the quality change is not accounted for. 
C) It decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted for. 
D) It decreases, so the CPI understates the change in the cost of living if the quality change is not accounted for. 
A) It increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for. 
B) It increases, so the CPI understates the change in the cost of living if the quality change is not accounted for. 
C) It decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted for. 
D) It decreases, so the CPI understates the change in the cost of living if the quality change is not accounted for.

In Canada, if the price of imported oil rises so that the price of gasoline and heating oil rise, what happens to the GDP deflator and the consumer price index?

Consumers begin purchasing houses incorporating steel studs instead of wooden studs after the price of lumber increases. Which of the following problems in the construction of the CPI does this situation best represent?

Research done at the Bank of Canada suggests that the sources of bias in CPI, taken together, cause the Canadian CPI to overstate increases in the cost of living by about how much?

Which of the following best describes the correlation between nominal and real interest rates?

Welfare payments are indexed for inflation using the CPI. A recent newspaper editorial claimed that welfare recipients are harmed by years of low inflation because they do not receive as large an increase in their payments as they do in years of high inflation. Is the newspaper editorial correct?

Samantha deposits $2000 into a saving account that pays an annual interest rate of 5 percent. Over the course of a year, the inflation rate is 2 percent. What happens at the end of the year?

From October 2009 to October 2010, the CPI in country A rose from 116.5 to 119.8. In country B, it rose from 97.2 to 102.3. What were the inflation rates in the two countries?

How do the CPI and the GDP deflator relate to each other?

Table 6-5 The table below pertains to an economy with only two goods-books and calculators. The fixed basket consists of 5 books and 10 calculators. -Refer to Table 6-5. Using 2007 as the base year, what is the consumer price index?

Suppose the price of CD players increases dramatically, causing a 1 percent increase in the CPI. By how much will the GDP deflator most likely increase?

If the consumer price index was 100 in the base year and 107 the following year, what was the inflation rate?

The CPI is computed by finding the price of a market basket of goods whose contents vary each year.

From 2000 to 2001 the CPI for medical care rose from 260.8 to 272.8. What was the inflation rate for medical care?

The price index in the first year is 100, in the second year is 90, and in the third year is 80. What is the deflation rate between the first and second year, and between the second and third year?

Which of the following best describes nominal interest rates in the 1970s and 1990s?

When the quality of a good improves, what happens to the purchasing power of the dollar?

If there is a reduction in the price of large tractors imported into Canada from Russia, what happens to the GDP deflator and the consumer price index?

When the quality of a good deteriorates, what happens to the purchasing power of the dollar?

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Measuring a Nations Income

Production and Growth

Saving, Investment, and the Financial System

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

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 Tradeoff Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

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Exam 6: Measuring the Cost of Living

In Canada, if the price of imported oil rises so that the price of gasoline and heating oil rise, what happens to the GDP deflator and the consumer price index?

Consumers begin purchasing houses incorporating steel studs instead of wooden studs after the price of lumber increases. Which of the following problems in the construction of the CPI does this situation best represent?

Research done at the Bank of Canada suggests that the sources of bias in CPI, taken together, cause the Canadian CPI to overstate increases in the cost of living by about how much?

Which of the following best describes the correlation between nominal and real interest rates?

Welfare payments are indexed for inflation using the CPI. A recent newspaper editorial claimed that welfare recipients are harmed by years of low inflation because they do not receive as large an increase in their payments as they do in years of high inflation. Is the newspaper editorial correct?

Samantha deposits $2000 into a saving account that pays an annual interest rate of 5 percent. Over the course of a year, the inflation rate is 2 percent. What happens at the end of the year?

From October 2009 to October 2010, the CPI in country A rose from 116.5 to 119.8. In country B, it rose from 97.2 to 102.3. What were the inflation rates in the two countries?

How do the CPI and the GDP deflator relate to each other?

Table 6-5 The table below pertains to an economy with only two goods-books and calculators. The fixed basket consists of 5 books and 10 calculators. -Refer to Table 6-5. Using 2007 as the base year, what is the consumer price index?

Suppose the price of CD players increases dramatically, causing a 1 percent increase in the CPI. By how much will the GDP deflator most likely increase?

If the consumer price index was 100 in the base year and 107 the following year, what was the inflation rate?

The CPI is computed by finding the price of a market basket of goods whose contents vary each year.

From 2000 to 2001 the CPI for medical care rose from 260.8 to 272.8. What was the inflation rate for medical care?

The price index in the first year is 100, in the second year is 90, and in the third year is 80. What is the deflation rate between the first and second year, and between the second and third year?

Which of the following best describes nominal interest rates in the 1970s and 1990s?

When the quality of a good improves, what happens to the purchasing power of the dollar?

If there is a reduction in the price of large tractors imported into Canada from Russia, what happens to the GDP deflator and the consumer price index?

When the quality of a good deteriorates, what happens to the purchasing power of the dollar?

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Measuring a Nations Income

Production and Growth

Saving, Investment, and the Financial System

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

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 Tradeoff Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

Filters