Question 1

Which of the following would be included in the Consumer Price Index but not in the GDP Price Index?

Accepted Answer

A)  The price of a used automobile 
B)  The price of a dinner in a U.S.restaurant 
C)  The price of a U.S.-manufactured stereo system 
D)  The price of an IBM computer 
E)  The price of a new Ford automobile 
A)  The price of a used automobile 
B)  The price of a dinner in a U.S.restaurant 
C)  The price of a U.S.-manufactured stereo system 
D)  The price of an IBM computer 
E)  The price of a new Ford automobile

Question 2

Assume you are lending money to a friend for a year and want to earn real interest of 5 percent on the loan.If you believe the inflation rate the next year will be 3 percent,you should charge your friend a nominal interest rate of

Accepted Answer

A)  5 percent 
B)  8 percent 
C)  3 percent 
D)  15 percent 
E)  whatever he will pay 
A)  5 percent 
B)  8 percent 
C)  3 percent 
D)  15 percent 
E)  whatever he will pay

Question 3

If we knew that the price of goods rose,on average,by 5 percent last year and by 4 percent this year,we would know

Accepted Answer

A)  nothing about the rate of inflation 
B)  that the inflation rate is rising 
C)  that the inflation rate is falling 
D)  that we are in a stagflation 
E)  that we are in a recession 
A)  nothing about the rate of inflation 
B)  that the inflation rate is rising 
C)  that the inflation rate is falling 
D)  that we are in a stagflation 
E)  that we are in a recession

Question 4

Economists widely agree that the Consumer Price Index (CPI)understates the true U.S.inflation rate.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following prices is least likely to be included in the Consumer Price Index?

Accepted Answer

A)  The price of used bicycles 
B)  The price of a haircut 
C)  The price of imported South American grapes 
D)  The price of a steamroller 
E)  The price of a loaf of bread 
A)  The price of used bicycles 
B)  The price of a haircut 
C)  The price of imported South American grapes 
D)  The price of a steamroller 
E)  The price of a loaf of bread

Question 6

An index number is important only in a relative sense -- in comparison to an index number from another period.

Accepted Answer

A) True 
 B)False

Question 7

Inflation reduces the average real income in the economy and redistributes purchasing power.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following would be included in the GDP Price Index,but not the Consumer Price Index?

Accepted Answer

A)  The price of a pair of shoes 
B)  The price of coffee 
C)  The price of a used car 
D)  The price of a bar of soap 
E)  The price of an aircraft carrier 
A)  The price of a pair of shoes 
B)  The price of coffee 
C)  The price of a used car 
D)  The price of a bar of soap 
E)  The price of an aircraft carrier

Question 9

Why would workers and retirees want to have their wages and benefits indexed to the Consumer Price Index (CPI)?

Accepted Answer

A)  To lower their purchasing power during years of rising prices 
B)  To maintain their purchasing power during years of rising output 
C)  To maintain their purchasing power during years of declining output 
D)  To increase their purchasing power during years of negative inflation 
E)  To maintain their purchasing power during years of rising prices 
A)  To lower their purchasing power during years of rising prices 
B)  To maintain their purchasing power during years of rising output 
C)  To maintain their purchasing power during years of declining output 
D)  To increase their purchasing power during years of negative inflation 
E)  To maintain their purchasing power during years of rising prices

Question 10

If you believe that the inflation rate is likely to be high over the next ten years,you would want to

Accepted Answer

A)  have a pension with raises indexed to the CPI if you were going to be retiring 
B)  obtain a variable rate mortgage 
C)  not obtain any fixed rate consumer loans 
D)  pay off all of your existing fixed rate loans 
E)  be a shareholder of a bank because their profits are going to increase dramatically 
A)  have a pension with raises indexed to the CPI if you were going to be retiring 
B)  obtain a variable rate mortgage 
C)  not obtain any fixed rate consumer loans 
D)  pay off all of your existing fixed rate loans 
E)  be a shareholder of a bank because their profits are going to increase dramatically

Question 11

One proposal is to index social security payments

Accepted Answer

A)  to the CPI minus half a percentage point to correct for the CPI's overstatement of inflation. 
B)  to the CPI plus half a percentage point to correct for the CPI's overstatement of inflation. 
C)  to the CPI minus half a percentage point to correct for the CPI's understatement of inflation. 
D)  to the average tax rate that social security recipients face. 
E)  to the average increase in the CPI over the last five years. 
A)  to the CPI minus half a percentage point to correct for the CPI's overstatement of inflation. 
B)  to the CPI plus half a percentage point to correct for the CPI's overstatement of inflation. 
C)  to the CPI minus half a percentage point to correct for the CPI's understatement of inflation. 
D)  to the average tax rate that social security recipients face. 
E)  to the average increase in the CPI over the last five years.

Question 12

The consumer price index includes all of the following goods and services except

Accepted Answer

A)  bonds of US corporations 
B)  French wine 
C)  Japanese VCRs 
D)  used cars 
E)  toiletries 
A)  bonds of US corporations 
B)  French wine 
C)  Japanese VCRs 
D)  used cars 
E)  toiletries

Question 13

Inflation imposes a cost on society by directly decreasing average real income in the economy.

Accepted Answer

A) True 
 B)False

Question 14

If you lend money at a nominal interest rate of 9 percent and the inflation rate is 1 percent,what real interest rate will you earn?

Accepted Answer

A)  3 percent 
B)  4 percent 
C)  8 percent 
D)  12 percent 
E)  15 percent 
A)  3 percent 
B)  4 percent 
C)  8 percent 
D)  12 percent 
E)  15 percent

Question 15

Parvez is trying to decide whether or not he should lend $1,000 to Eli for a year.Eli would pay a fixed nominal interest rate of 8 percent.Parvez expects the inflation rate to be 4 percent for the year.If he does not lend the $1,000 to Eli,Parvez will purchase an indexed savings bond that pays an interest rate of 4 percent,or he will put the money in a (nonindexed)savings account earning 6 percent.Parvez

Accepted Answer

A)  will earn 4 percent in real terms if he loans Eli the money,0 percent in real terms if he buys the bond,and 6 percent in real terms if he puts the money into a savings account 
B)  is better off holding his money as cash 
C)  is indifferent between lending the money to Eli and buying the bond because the real interest rate is the same in either case 
D)  should purchase the bond because it earns the highest real rate of interest 
E)  earns the highest real rate of interest if he puts his $1,000 into a savings account 
A)  will earn 4 percent in real terms if he loans Eli the money,0 percent in real terms if he buys the bond,and 6 percent in real terms if he puts the money into a savings account 
B)  is better off holding his money as cash 
C)  is indifferent between lending the money to Eli and buying the bond because the real interest rate is the same in either case 
D)  should purchase the bond because it earns the highest real rate of interest 
E)  earns the highest real rate of interest if he puts his $1,000 into a savings account

Question 16

If the base year for an index is 2005 and the value of the index in 2008 is 165.1,by what percent has the measure grown over those 3 years?

Accepted Answer

A)  165.1 percent 
B)  100.0 percent 
C)  6.51 percent 
D)  0 percent 
E)  65.1 percent 
A)  165.1 percent 
B)  100.0 percent 
C)  6.51 percent 
D)  0 percent 
E)  65.1 percent

Question 17

Your friend Shahla argues that inflation is bad for the economy because it lowers everyone's purchasing power.How would an economist respond to Shahla's statement?

Accepted Answer

A)  Her statement is true. 
B)  Her statement is false because inflation redistributes income but does not change the average level of income in the economy. 
C)  Her statement is true when everyone's nominal income changes by the same amount. 
D)  Her statement is true when wages and benefits are not indexed to the CPI. 
E)  Her statement is true only in a closed economy. 
A)  Her statement is true. 
B)  Her statement is false because inflation redistributes income but does not change the average level of income in the economy. 
C)  Her statement is true when everyone's nominal income changes by the same amount. 
D)  Her statement is true when wages and benefits are not indexed to the CPI. 
E)  Her statement is true only in a closed economy.

Question 18

Suppose that the inflation rate for a given year was 3%.In that year,

Accepted Answer

A)  all prices rose by 3% 
B)  prices on average rose by 3% 
C)  the economy was in an expansion 
D)  the economy was in a recession 
E)  the inflation rate was rising 
A)  all prices rose by 3% 
B)  prices on average rose by 3% 
C)  the economy was in an expansion 
D)  the economy was in a recession 
E)  the inflation rate was rising

Question 19

"Rising prices" and "rising inflation" mean the same thing.

Accepted Answer

A) True 
 B)False

Question 20

Assume that the firefighters have gone without a pay increase for 4 years during a tough time in their city's finances.Suppose that things start to look up and the Mayor wants to make up for lost time.If the CPI in 2002 was 125 and 150 in 2006,how much will salaries have to increase to bring the firefighters back up to their real income from 2002?

Accepted Answer

A)  150.0% 
B)  125.0% 
C)  20.0% 
D)  16.7% 
E)  25.0% 
A)  150.0% 
B)  125.0% 
C)  20.0% 
D)  16.7% 
E)  25.0%

Exam 19: The Price Level and Inflation

Which of the following would be included in the Consumer Price Index but not in the GDP Price Index?

Assume you are lending money to a friend for a year and want to earn real interest of 5 percent on the loan.If you believe the inflation rate the next year will be 3 percent,you should charge your friend a nominal interest rate of

If we knew that the price of goods rose,on average,by 5 percent last year and by 4 percent this year,we would know

Economists widely agree that the Consumer Price Index (CPI)understates the true U.S.inflation rate.

Which of the following prices is least likely to be included in the Consumer Price Index?

An index number is important only in a relative sense -- in comparison to an index number from another period.

Inflation reduces the average real income in the economy and redistributes purchasing power.

Which of the following would be included in the GDP Price Index,but not the Consumer Price Index?

Why would workers and retirees want to have their wages and benefits indexed to the Consumer Price Index (CPI)?

If you believe that the inflation rate is likely to be high over the next ten years,you would want to

One proposal is to index social security payments

The consumer price index includes all of the following goods and services except

Inflation imposes a cost on society by directly decreasing average real income in the economy.

If you lend money at a nominal interest rate of 9 percent and the inflation rate is 1 percent,what real interest rate will you earn?

If the base year for an index is 2005 and the value of the index in 2008 is 165.1,by what percent has the measure grown over those 3 years?

Your friend Shahla argues that inflation is bad for the economy because it lowers everyone's purchasing power.How would an economist respond to Shahla's statement?

Suppose that the inflation rate for a given year was 3%.In that year,

"Rising prices" and "rising inflation" mean the same thing.

What Is Economics

Scarcity,choice,and Economic Systems

Scarcity, choice, and Economic Systems: Part A

Working With Supply and Demand

Elasticity

Consumer Choice

Production and Cost

How Firms Make Decisions: Profit Maximization

Perfect Competition

Perfect Competition: Part A

Monopoly

Monopolistic Competition and Oligopoly

Labor Markets

labor Markets: Part A

Capital and Financial Markets

Economic Efficiency and the Competitive Ideal

Governments Role in Economic Efficiency

Comparative Advantage and the Gains From International Trade

What Macroeconomics Tries to Explain

Production, income, and Employment

The Classical Long-Run Model

Part A: The Classical Model in an Open Economy

Economic Growth and Rising Living Standards

Economic Fluctuations

The Short-Run Macro Model

Fiscal Policy

Money,banks,and the Federal Reserve

The Money Market and Monetary Policy

Feedback Effects From GDP to the Money Market

Aggregate Demand and Aggregate Supply

Inflation and Monetary Policy

Exchange Rates and Macroeconomic Policy

Appendix-finding Equilibrium GDP Algebraically

Appendix: Capital and Leverage

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