Question 1

A payment that is periodically adjusted in proportion to a price index such as the CPI is known as a(n)

Accepted Answer

A)   unionized payment.
B)   indexed payment.
C)   scaled payment.
D)   inflated payment.
E)   adjusted payment.

Question 2

A low rate of inflation,whereby prices increase so slowly from week to week that we hardly notice the change,is referred to as

Accepted Answer

A)   zero inflation
B)   creeping inflation
C)   nominal inflation
D)   real inflation
E)   episodic inflation

Question 3

Which of the following is a definition of the real interest rate in a world with a positive inflation rate?

Accepted Answer

A)   The percentage increase in the borrower's purchasing power from taking a loan
B)   The percentage decrease in the borrower's dollars from taking a loan
C)   The percentage increase in the lender's purchasing power from making a loan
D)   The percentage increase in the lender's dollars from making a loan
E)   The percentage decrease in the lender's dollars from making a loan

Question 4

What is the value of any index in the base period?

Accepted Answer

A)   200
B)   150
C)   110
D)   100
E)   105

Question 5

Factors that cause the CPI to exaggerate the inflation rate do not include

Accepted Answer

A)   the tendency of consumers to substitute relatively cheaper goods for those that have become relatively more expensive
B)   political pressure from unions and retirees on the Bureau of Labor Statistics to overstate the inflation rate
C)   the introduction of new technologies that make it easier to obtain the same standard of living
D)   improvements over time on the quality of products
E)   the increase in purchases from discount stores

Question 6

Careetha has just taken a fixed-rate loan and agreed to pay a nominal interest rate of 6 percent.If the inflation rate during the first year of the loan was 2 percent,her real interest rate that first year was

Accepted Answer

A)   6 percent
B)   8 percent
C)   4 percent
D)   12 percent
E)   impossible to calculate without additional information

Question 7

Whenever prices are rising,the inflation rate is rising.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A)   The price of a Chrysler automobile
B)   The price of a fighter aircraft
C)   The price of a used computer
D)   The price of a tube of toothpaste
E)   The price of a bottle of shampoo

Question 9

Suppose the Consumer Price Index (CPI) increased by 5 percent over each of the last 5 years while the GDP price index increased by 12 percent annually.Which of the following reasons could explain this difference?

Accepted Answer

A)   Police unions across the country agreed to substantial salary cuts.
B)   Import good prices increased relative to domestic good prices.
C)   The price of used automobiles increased substantially relative to the prices of other goods.
D)   The price of fighter planes dropped due to increased competition in the aerospace industry.
E)   The price of investment goods purchased by businesses increased substantially relative to the prices of all other goods.

Question 10

Suppose Mike agrees to borrow $100 from Renee for one year at a one-time interest payment of 5%.They both expected the inflation rate to be 2% during the one-year period.However,during that year the inflation rate was actually 1%.Which of the following has occurred?

Accepted Answer

A)   The unexpectedly low inflation rate has redistributed $1 from Mike to Renee
B)   The unexpectedly low inflation rate has redistributed $5 from Mike to Renee
C)   The unexpectedly high inflation rate has redistributed $1 from Mike to Renee
D)   There have not been any redistribution costs to either party
E)   The unexpectedly low inflation rate has redistributed $1 from Renee to Mike

Question 11

If inflation is fully anticipated and if there are no restrictions on contracts,then inflation will not redistribute purchasing power.

Accepted Answer

A) True 
 B)False

Question 12

If the prices of domestic consumer goods increased while the prices of imported consumer goods decreased,and the demand for each remained the same,which of the following would most likely occur?

Accepted Answer

A)   The GDP price index would decrease while the CPI would increase.
B)   Both the GDP price index and the CPI would decrease.
C)   The GDP price index would increase more than the CPI.
D)   The CPI would increase more than the GDP price index.
E)   Both the GDP price index and the CPI would increase by the same amount.

Question 13

If the CPI overstates the true rate of inflation,then

Accepted Answer

A)   the economy will grow more slowly than if inflation was measured accurately
B)   the economy will grow more rapidly than if inflation was measured accurately
C)   social security payments will increase in real terms
D)   social security payments will decrease in real terms
E)   so will other means of measuring the inflation rate

Question 14

Suppose the economy includes two distinct groups of people: wage earners and goods sellers.If the price level falls by 10 percent and nominal wages remain unchanged,

Accepted Answer

A)   there will be no redistribution of purchasing power because all wage earners in the U.S.economy receive indexed wages
B)   income will be redistributed from wage earners to goods sellers
C)   income will be redistributed from goods sellers to wage earners
D)   real wages will fall by 10 percent
E)   real wages will remain unchanged

Question 15

The index used to translate nominal GDP into real GDP is the

Accepted Answer

A)   Consumer Price Index
B)   Wholesale Price Index
C)   GDP Price Index
D)   Producer Price Index
E)   Manufacturer's Input Price Index

Question 16

A real variable is

Accepted Answer

A)   measured in terms of after-tax dollars
B)   measured in terms of dollars and not foreign currency
C)   measured in nominal terms
D)   measured in terms of current dollars
E)   measured in terms of purchasing power

Question 17

Which of the following would be considered a resource cost of inflation?

Accepted Answer

A)   A cost of living adjustment
B)   Loss of purchasing power
C)   Additional trips to the bank
D)   Adjusting nominal interest rate to get real rates
E)   Creeping inflation

Question 18

If inflation is higher than anticipated and benefits are not indexed,which group loses purchasing power?

Accepted Answer

A)   Borrowers and lenders
B)   Lenders and retirees
C)   Borrowers and retirees
D)   Only borrowers
E)   Only lenders

Question 19

Most economists agree that the size of the bias in the CPI is at least

Accepted Answer

A)   0.1 percent
B)   0.5 percent
C)   1 percent
D)   1.5 percent
E)   2 percent

Question 20

The Consumer Price Index (CPI)

Accepted Answer

A)   measures the prices of all goods produced in the economy
B)   includes prices of raw materials
C)   is found by averaging the prices of all goods consumed in the economy
D)   includes only the prices of domestically produced consumer goods
E)   includes the prices of some used consumer goods

Exam 19: The Price Level and Inflation

Which of the following would be considered a resource cost of inflation?

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If inflation is higher than anticipated and benefits are not indexed,which group loses purchasing power?

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If the prices of domestic consumer goods increased while the prices of imported consumer goods decreased,and the demand for each remained the same,which of the following would most likely occur?

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If the CPI overstates the true rate of inflation,then

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

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If inflation is fully anticipated and if there are no restrictions on contracts,then inflation will not redistribute purchasing power.

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Which of the following is a definition of the real interest rate in a world with a positive inflation rate?

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A payment that is periodically adjusted in proportion to a price index such as the CPI is known as a(n)

Correct AnswerverifiedShow Answer

Suppose Mike agrees to borrow $100 from Renee for one year at a one-time interest payment of 5%.They both expected the inflation rate to be 2% during the one-year period.However,during that year the inflation rate was actually 1%.Which of the following has occurred?

Correct AnswerverifiedShow Answer

Suppose the economy includes two distinct groups of people: wage earners and goods sellers.If the price level falls by 10 percent and nominal wages remain unchanged,

Correct AnswerverifiedShow Answer

Factors that cause the CPI to exaggerate the inflation rate do not include

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What is the value of any index in the base period?

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Suppose the Consumer Price Index (CPI) increased by 5 percent over each of the last 5 years while the GDP price index increased by 12 percent annually.Which of the following reasons could explain this difference?

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Careetha has just taken a fixed-rate loan and agreed to pay a nominal interest rate of 6 percent.If the inflation rate during the first year of the loan was 2 percent,her real interest rate that first year was

Correct AnswerverifiedShow Answer

The Consumer Price Index (CPI)

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A real variable is

Correct AnswerverifiedShow Answer

Most economists agree that the size of the bias in the CPI is at least

Correct AnswerverifiedShow Answer

A low rate of inflation,whereby prices increase so slowly from week to week that we hardly notice the change,is referred to as

Correct AnswerverifiedShow Answer

Whenever prices are rising,the inflation rate is rising.

Correct AnswerverifiedShow Answer

The index used to translate nominal GDP into real GDP is the

Correct AnswerverifiedShow Answer

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