chp 24

The US Federal Open Market Committee views ________ as an acceptable level of inflation per year in the US (as measured by the CPI). -2% 5% 2% 0

2%

Given the following information for any given year the real interest rate for the year was 3%. the nominal interest rate for the year was 6%. What was the inflation rate that year? There is not enough information provided to answer this question 9% 3% 6%

3%

If the CPI in the first year was 90, in the second year was 100, and in the third year was 95, the economy experienced Approximately 15 percent inflation between the first and second years and approximately 5 percent inflation between the second and third years. Approximately 11 percent inflation between the first and second years and approximately 5 percent deflation between the second and third years. Exactly 10 percent inflation between the first and second years and exactly 5 percent inflation between the second and third years. Exactly 20 percent inflation between the first and second years and exactly 5 percent deflation between the second and third years.

Approximately 11 percent inflation between the first and second years and approximately 5 percent deflation between the second and third years.

A price index in years after the base year: Is never 100 Can be less than, greater than, or equal to 100 Is always greater than 100 Is always less than 100

Can be less than, greater than, or equal to 100

When prices are falling, economists say that there is inflation a contraction deflation an inverted inflation

Deflation

If the price level rises, the value of money (buying power) falls None of these answers are correct falls and then rises rises and then falls rises

Falls

Unexpected inflation will: Hurt borrowers Hurt borrowers and lenders equally Have no effect on either borrowers or lenders Hurt lenders

Hurt Lenders

Determine the effects on the CPI and the GDP deflator if Caterpillar raises the price of the industrial tractors it manufactures at its Illinois factory. The GDP deflator rises but the CPI does not The GDP deflator does not change but the CPI rises Caterpillar is a foreign owned company so their output is not included in the US GDP or CPI The GDP deflator rises and the CPI raises

The GDP deflator rises but the CPI does not

The consumer price index is computed by comparing the cost of the typical market basket of goods purchased during a base year (evaluated at base year prices) with: The cost of the same market basket evaluated at base year prices The cost of the current market basket evaluated at current prices The cost of the current market basket evaluated at base-year prices The cost of the same market basket evaluated at current prices

The cost of the same market basket evaluated at current prices

Which of the following statements is FALSE? Whether you gain or lose during a period of inflation depends on whether your income rises faster or slower than the prices of the things you buy There are no costs or losses associated with expected inflation When unanticipated inflation occurs regularly, the degree of risk associated with investments in the economy increases Inflation that is higher than expected benefits borrowers, and inflation that is lower than expected benefits lenders

There are no costs or losses associated with expected inflation

The CPI is a measure of the overall cost of goods and services bought by a typical producer is based on real GDP versus nominal GDP is a measure of overall cost of all goods and services produced in an economy a measure of the overall cost of goods and services bought by a typical consumer

a measure of the overall cost of goods and services bought by a typical consumer

________ is/are an example/s of a government program/s that is/are indexed all of these answers are correct Social Security Various parts of Medicare Supplemental Nutrition Assistance Program (SNAP) Various parts of Medicaid

all of these answers are correct

The price index used to calculate most cost-of-living adjustments (COLAs) is the: consumer price index NDP deflator GDP deflator producer price index

consumer price index

The substitution bias in the consumer price index refers to the fact that consumers substitute toward goods that have become relatively less expensive. substitution of quality for quantity in consumer purchases over time. substitution of new prices for old prices in the basket of goods from one year to the next. substitution of new goods for old goods in the purchases of consumers.

fact that consumers substitute toward goods that have become relatively less expensive.

The CPI is based on a fixed basket of consumer goods and calculated by the BLS fixed basket of goods and calculated by the Council of Economic Advisors fixed basket of producer goods and calculated by the BLS variable basket of goods and calculated by the Fed

fixed basket of consumer goods and calculated by the BLS

The CPI and the GDP deflator generally show different patterns of movement. always show identical changes. generally move together. always show different patterns of movement.

generally move together.

The real interest rate tells you the purchasing power of your bank account. how fast the number of dollars in your bank account rises over time. how fast the purchasing power of your bank account rises over time. the number of dollars in your bank account.

how fast the purchasing power of your bank account rises over time.

The nominal interest rate is the interest rate corrected for inflation. real cost of borrowing to the borrower. interest rate as usually reported by banks. real rate of return to the lender.

interest rate as usually reported by banks.

The formula to compute the real interest rate is real interest rate - inflation real interest rate - nominal interest rate nominal interest rate - inflation rate inflation rate - nominal interest rate

nominal interest rate - inflation rate

The term "inflation" is used to describe a situation in which the economy is growing rapidly. incomes in the economy are increasing. the overall level of prices in the economy is increasing. stock-market prices are rising.

the overall level of prices in the economy is increasing.