Chapter 11

If the CPI was 95 in 1955 and is 475 today, then $100 today purchases the same amount of goods and services as

$20.00 purchased in 1955

The real interest rate tells you

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

Which of the following statements is correct about the relationship between inflation and interest rates?

In order to fully understand interest rates, we need to know how to correct for the effects of inflation.

Suppose that over the past year, the real interest rate was 6 percent and the inflation rate was 4 percent. It follows that

The dollar value of savings increased at 10 percent, and the purchasing power of savings increased at 6 percent.

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?

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

The CPI differs from the GDP deflator in that

increases in the prices of foreign produced goods that are sold to U.S. consumers show up in the CPI but not in the GDP deflator.

Suppose the price of a quart of milk rises from $1.00 to $1.20 and the price of a T-shirt rises from $8.00 to $9.60. If the CPI rises from 150 to 195, then people likely will buy

more milk and more T-shirts.

Consider a small economy in which consumers buy only two goods: pretzels and cookies. In order to compute the consumer price index for this economy for two or more consecutive years, we assume that

neither the number of pretzels nor the number of cookies bought by the typical consumer changes from year to year.