Question 1

If the nominal interest rate is 6 percent and the rate of inflation is 10 percent,then the real interest rate is

Accepted Answer

A) -16 percent. 
B) -4 percent. 
C) 4 percent. 
D) 16 percent.

Question 2

The nominal interest rate tells you

Accepted Answer

A) how fast the number of dollars in your bank account rises over time. 
B) how fast the purchasing power of your bank account rises over time. 
C) the number of dollars in your bank account today. 
D) the purchasing power of your bank account today.

Question 3

During a certain year,the consumer price index increased from 120 to 132 and the purchasing power of a person's bank account increased by 4 percent.For that year,

Accepted Answer

A) the nominal interest rate was 6 percent. 
B) the nominal interest rate was 14 percent. 
C) the inflation rate was 12 percent. 
D) the inflation rate was 9 percent.

Question 4

Ms.Lane borrowed $1,000 from her bank for one year at an interest rate of 10 percent.During that year,the price level went up by 15 percent.Which of the following statements is correct?

Accepted Answer

A) Ms.Lane will repay the bank fewer dollars than she initially borrowed. 
B) Ms.Lane's repayment will give the bank less purchasing power than it originally loaned her. 
C) Ms.Lane's repayment will give the bank greater purchasing power than it originally loaned her. 
D) Ms.Lane's repayment will give the bank the same purchasing power that it originally loaned her.

Question 5

Which of the following statements about real and nominal interest rates is correct?

Accepted Answer

A) Real interest rates can be either positive or negative,but nominal interest rates must be positive. 
B) Real interest rates and nominal interest rates must be positive. 
C) Real interest rates must be positive,but nominal interest rates can be either positive or negative. 
D) Real interest rates and nominal interest rates can be either positive or negative.

Question 6

A worker received $5 for a daily wage in 1930,which has the equivalent value of $63.24 today.If the CPI was 17 in 1930 what is the value of the CPI today,rounded to the nearest whole number?

Accepted Answer

A) 215 
B) 134 
C) 17 
D) 1.3

Question 7

Arlo is offered a job in Des Moines,where the CPI is 80,and a job in New York,where the CPI is 125.Arlo's job offer in Des Moines is for $42,000.How much does the New York job have to pay in order for the two salaries to represent the same purchasing power?

Accepted Answer

A) $42,000 
B) $65,625 
C) $68,880 
D) $189,000

Question 8

Nate collected Social Security payments of $220 a month in 1985.If the price index rose from 90 to 108 between 1985 and 1986,then his Social Security payments for 1986 should have been

Accepted Answer

A) $228. 
B) $238. 
C) $257. 
D) $264.

Question 9

Indexation refers to

Accepted Answer

A) a process of adjusting the nominal interest rate so that it is equal to the real interest rate. 
B) using a law or contract to automatically correct a dollar amount for the effects of inflation. 
C) using a price index to deflate dollar values. 
D) an adjustment made by the Bureau of Labor Statistics to the CPI so that the index is in line with the GDP deflator.

Question 10

Scenario 24-3
Sue Holloway was an accountant in 1944 and earned $12,000 that year.Her son,Josh Holloway,is an accountant today and he earned $210,000 in 2013.The price index was 17.6 in 1944 and 218.4 in 2013.
-Refer to Scenario 24-3.Josh Holloway's 2013 income in 1944 dollars is

Accepted Answer

A) $11,528. 
B) $16,923. 
C) $149,009. 
D) $26,059.

Question 11

Social Security payments are indexed for inflation using the CPI.A recent newspaper editorial claimed that Social Security 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.Which of the following statements is correct?

Accepted Answer

A) The newspaper editorial is correct under all circumstances. 
B) The newspaper editorial is correct if the market basket consumed by Social Security recipients is the same as the market basket used to compute the CPI. 
C) The newspaper editorial could be correct if the prices of the goods consumed by Social Security recipients change at a different rate than the prices of the goods in the market basket used to compute the CPI 
D) The newspaper editorial is incorrect under all circumstances.

Question 12

The CPI was 172 in 2007,and the CPI was 46.5 in 1982.If your parents put aside $1,000 for you in 1982,then how much would you have needed in 2007 in order to buy what you could have bought with the $1,000 in 1982?

Accepted Answer

A) $270.35 
B) $1,255.00 
C) $2,698.92 
D) $3,698.92

Question 13

Social Security payments are indexed for inflation using

Accepted Answer

A) the CPI. 
B) the PPI. 
C) the GDP deflator. 
D) real interest rates.

Question 14

If the CPI was 68 in 1965 and is 285 today,then $100 today purchases the same amount of goods and services as

Accepted Answer

A) $23.86 purchased in 1965. 
B) $32.47 purchased in 1965. 
C) $68.00 purchased in 1965. 
D) $419.12 purchased in 1965.

Question 15

Suppose in the year 2000 Ken earned $60,000 per year and that in 2015 he earned $78,000 per year.If the CPI in the year 2000 was 172.2 and in 2015 was 236.7,which of the following statements is correct?

Accepted Answer

A) ​Ken's standard of living got better from 2000 to 2015. 
B) ​If Ken had earned $81,000 in 2015,his standard of living would have improved relative to his income in 2000. 
C) ​Ken would have needed to earn $87,000 or more in 2015 for his standard of living to have improved relative to his income in 2000. 
D) ​If Ken had earned $83,000 in 2015,his standard of living would have improved relative to his income in 2000.

Question 16

When looking at a graph of nominal and real interest rates you notice the graph for nominal rates and the graph for real rates cross each other many times.From this you conclude

Accepted Answer

A) consumer prices sometimes rose and sometimes fell in the time frame represented on the graph. 
B) consumer prices were always rising in the time frame represented on the graph. 
C) the economy never experienced a recession in the time frame represented on the graph. 
D) GDP was always increasing for the time frame represented on the graph.

Question 17

You know that a candy bar costs sixty cents today.You also know the CPI for 1962 and the CPI for today.Which of the following would you use to compute the price of the candy bar in 1962 prices?

Accepted Answer

A) sixty cents  (today's CPI - 1962 CPI) 
B) sixty cents  (1962 CPI - today's CPI) 
C) sixty cents  (today's CPI / 1962 CPI) 
D) sixty cents  (1962 CPI / today's CPI)

Question 18

If the nominal interest rate is 6 percent and the rate of inflation is 2 percent,then the real interest rate is

Accepted Answer

A) -4 percent. 
B) 3 percent. 
C) 4 percent. 
D) 8 percent.

Question 19

Harry spent $39,000 in 2009 and $42,000 in 2014 on goods and services.The consumer price index was 220 for 2009 and 231 for 2014.Harry's 2014 spending in 2009 dollars is about

Accepted Answer

A) $40,000. 
B) $44,100. 
C) $37,838. 
D) $40,091.

Question 20

A COLA automatically raises the wage when

Accepted Answer

A) GDP increases. 
B) taxes increase. 
C) the consumer price index increases. 
D) the producer price index increases.

Exam 11: Measuring the Cost of Living: Correcting Economic Variables for the Effects of Inflation