Exam 2 Module 4
12.) Suppose that the CPI basket contains only 40 heads of cauliflower and 60 bunches of broccoli. If the price of cauliflower goes down by $1 per head and the price of broccoli goes up by $1 per bunch, then: A)the CPI decreases. B)the CPI increases. C)the CPI does not change. D)the CPI might increase or decrease depending how the quantities are affected by the price changes. E)There is not enough information to answer this question.
C
15.) The inflation rate is the: A)difference between the base period CPI and the current period CPI. B)difference in the price level from one year to the next multiplied by 100. C)percentage change in the CPI from one year to the next year. D)percentage change in the composition of the CPI market basket from the base year to the next year. E)difference between the current period CPI and the base period CPI.
C
17.) Deflation is a situation in which: A)inflation is accompanied by unemployment. B)the output growth rate is negative. C)the CPI is falling. D)all of the above E)none of the above
C
19.) The quality change bias is most likely to put ________ into the CPI and so ________ the inflation rate.: A)a downward bias; overstate B)an upward bias; understate C)an upward bias; overstate D)a random bias; randomly overstate or understate E)a downward bias; understate
C
21.) Mark has a two-year wage contract with his employer. Mark's wage contract specifies a $50,000salary for the first year, and specifies a salary increase equal to the percentage increase in the CPI during the second year. The percentage increase in the CPI during the year was 4.0 percentage points. If the CPI overstates inflation by 1.0 percentage point, at the end of the first year Mark's salary increased by ________ more than it would have without the upward bias.: A)$50 B)$2,000 C)$500 D)$1,500 E)$3,000
C
27.) The ________ is the average hourly wage rate measured in current dollars, while the ________ is the average hourly rate measured in the dollars of a given reference base year.: A)real interest rate; nominal interest rate B)inflation rate; real wage rate C)nominal wage rate; real wage rate D)nominal interest rate; real interest rate E)real wage rate; nominal wage rate
C
3.) Each month the CPI is calculated by: A) Recording the new prices and making no other calculation. B) Subtracting the current period cost of the CPI market basket from the base period cost and then multiplying by 100. C) Dividing the current cost of the CPI market basket by the base period cost and then multiplying by 100. D) Multiplying the current cost of the CPI market basket by the base period cost and then dividing by 100. E) Subtracting the base period cost of the CPI market basket from the current cost and then dividing by 100.
C
43.) The ________ cost of inflation is the result of a(n) ________ in velocity and is so-named because of________.: A)shoe leather; decrease; the shoe leather that is wasted in people running around trying to spend money quickly B)tax; decrease; the government collecting more tax revenue on all goods and services including basic items like shoes C)shoe leather; increase; the shoe leather that is wasted by people running around trying to spend money quickly D)confusion; increase; the shoe leather that is wasted by people running around trying to spend money quickly E)shoe leather; increase; the higher prices for all goods and services including basic items like shoes
C
5.) If the cost of the CPI market basket at current period prices is $1,000 and the cost of the CPI market basket at base period prices is $250, the CPI is: A)100 B)4.0 C)400 D)2.50 E)250
C
10.) Suppose that the cost of the CPI basket of goods and services rises from $137 in 2010, which is the base year, to $159 in 2011. The CPI in 2011 is ________ and the inflation rate from 2010 to 2011 is________.: A)116; 22 percent B)86; 14 percent C)86; 22 percent D)116; 16 percent E)There is not enough information to answer this question.
D
31.) If your nominal income is $75,000 and your real income in base year prices is $60,000, what is theCPI?: A)80 B)100 C)200 D)125 E)250
D
33.) If the bank returns $1,060 on the $1,000 deposited for a year during which inflation was 4 percent, the real interest rate is: A)10 percent. B)16 percent. C)6 percent. D)2 percent. E)-2 percent.
D
38.) High inflation makes money ________ because ________.: A)function better as a store of value; the money gains value and therefore has greater purchasing power B)function less well as a store of value; it decreases the price level and increases the buying power of money C)function better as a unit of account; money never loses value but it does gain purchasing power in some regions D)function less well as a store of value; the money loses value and therefore has less purchasing power E)function better as a store of value; it leads to a more accurate allocation of resources
D
40.) Inflation is known as a ________ because it ________.: A)bad thing; allows people to obtain the wrong kind of wealth B)revenue; is the only source of business income for the government C)tax; redistributes goods and services from the government to households and businesses D)tax; redistributes goods and services from households and businesses to the government E)good thing; keeps the value of goods and services increasing
D
6.) To find the cost of the CPI market basket in the base period prices we have to multiply the: A)current period quantities in the CPI market basket by the base period prices. B)current period quantities in the CPI market basket by the current period prices. C)quantities in the CPI market basket by the base period prices and then multiply by 100. D)quantities in the CPI market basket by the base period prices. E)quantities in the CPI market basket by the current period prices.
D
18.) When economists speak of the CPI bias, they are referring to: A)errors in measuring the prices used in the CPI. B)the tendency for the CPI to understate inflation. C)the tendency for the CPI to understate price changes. D)the tendency for government officials to impose their values on the data. E)the tendency for the CPI to overstate price changes.
E
23.) February 2010, the price of gasoline in the Florida was $2.629 per gallon and the CPI was 202.4with a base period of 1982 to 1984. What was the real price of gasoline per gallon in base period dollars?: A)$1.00 per gallon B)$1.809 per gallon C)$2.629 per gallon D)$5.32 per gallon E)$1.29 per gallon
E
32.) The percentage return on a loan expressed in terms of goods and services is the: A)real wage rate. B)nominal wage rate. C)nominal interest rate. D)CPI interest rate. E)real interest rate.
E
41.) Inflation ________ the cost of holding money and ________ the after-tax real interest rate.: A)increases; increases B)increases; does not change C)decreases; decreases D)decreases; increases E)increases; decreases
E
Real GDP is $1,400 billion and nominal GDP is $1,800. The GDP price index equals: A)77.0 B)222.2 C)2.86 D)100.0 E)128.6.
E
13.) Table Problem
Practice
14.) Table Problem
Practice
34.) Graph Problem
Practice
45.) Essay w/ Table Problem
Practice
48.) Essay/Table Problem
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49.) Essay/Table Problem
Practice
Table Problem
Practice
1.) The Consumer Price Index (CPI) measures the changes of the: A) Prices paid by consumers for a fixed market basket of consumer goods and services. B) Quantities of a fixed market basket of goods produced by businesses. C) Prices paid by consumers and businesses for a fixed market basket of goods and services. D) Prices paid by all businesses for a fixed market basket of production resources. E) Lowest prices paid by consumers for a fixed market basket of consumer goods and services.
A
11.) Suppose that last year, the price of strawberries was $2 and the price of milk was $1. This year, theprice of milk is $2 and the price of strawberries is $1. Which of the following statements is TRUE?: A)The CPI might increase or decrease depending on the quantities in the CPI market basket. B)The CPI does not change because the change in the two prices is the same. C)The CPI decreases because strawberries are cheaper. D)The CPI increases because milk is more expensive. E)The change in the CPI depends how the market basket changed between the two years.
A
24.) During 1990, a Hershey candy bar cost $.85. By 2007, the same Hershey candy bar cost $1.25. If theCPI was 130.7 in 1990 and 180.5 in 2007, the price of the 1990 Hershey candy bar in 2007 prices is: A)less than the price of the 2007 Hershey candy bar. B)equivalent to the price of the 2007 Hershey candy bar. C)greater than the price of the 2007 Hershey candy bar. D)perhaps greater than, perhaps less, or perhaps the same depending on whether the CPI in2007 has been adjusted to reflect 2007 prices. E)not able to be determined given the information in the question.
A
28.) Suppose that residents of France have seen their real wage rate increase over time. This means that: A)French workers have increased buying power. B)the CPI must have decreased over time. C)French workers' inflation rate has increased over time. D)French workers have increased their average hours of labor over time. E)French workers have received increases in their nominal wage rate over time.
A
30.) When Cameron began his career with SBC, his starting salary was $32,000. Four years later his salary increased to $35,000. If the CPI was 100.0 when he started and four years later is 107.5,Cameron's real income after four years is: A)$32,558 B)$32,000 C)$37,625 D)$35,000 E)$34,400.
A
35.) For the purpose of measuring the cost of living for consumers, one reason the GDP price index isNOT a good substitute for the CPI is because the GDP price index: A)includes the prices of exported goods, which are not consumed in the United States. B)and the CPI move in the same direction over time. C)has a larger bias than does the CPI. D)compares a current year basket of goods with a base year basket of goods. E)compares current year's prices with base year's prices.
A
36.) If Caterpillar Inc. raises the price of earth-moving equipment that it manufactures in Illinois, then the CPI will ________ and the GDP deflator will ________.: A)not change; increase B)increase; increase by less than the CPI C)increase; increase D)not change; not change E)increase; not change
A
39.) During an inflationary period, a household with savings of $100,000: A)loses because inflation increases the real tax on the interest paid. B)loses because the inflation increases the after-tax real interest rate. C)gains because inflation increases the value of their savings. D)gains because the inflation gives savers more money and so more purchasing power. E)neither gains nor loses because inflation does not affect savers.
A
42.) Assume an economy begins with zero inflation, a 25 percent income tax rate, and a real interest rate of 4 percent. If inflation rises to 4 percent, the nominal interest rate becomes ________ percent and the after-tax real interest becomes ________ percent.: A)8; 2 B)0; 1 C)6; 2 D)8; 6 E)8; 4
A
47.) A consequence of hyperinflation is that people: A)spend time trying to keep their money holdings near zero. B)want to lend funds because interest rates are so high. C)who make fixed-payment loans to others receive higher payments as inflation increases. D)receive higher real wage hikes, which increases their purchasing power for goods and services. E)increase the quantity of money demanded.
A
7.) When the cost of the CPI market basket increases from one year to the next, we know that: A)the prices of the goods and services contained in the CPI market basket have increased on the average. B)the quantities of the goods and services contained in the CPI market basket have increased on the average. C)on the average, current prices are below base year prices. D)on the average, current prices are less than past year prices. E)either the quantities of the goods and services contained in the CPI market basket have increased on the average and/or the prices of the goods and services contained in the CPI market basket have increased on the average.
A
8.) If the cost of the CPI market basket at current period prices is $275 and the cost of the CPI market basket at base period prices is $350, the CPI is: A)79 B)100 C)275 D)127 E)350
A
9.) Suppose the CPI for this year is 133.7. This number means that: A)prices rose 33.7 percent over the base year. B)prices rose 133.7 percent over the base year. C)prices rose 133.7 percent over the last year. D)prices rose 33.7 percent over the last year. E)on average, goods cost $133.70 each this year.
A
16.) The CPI was 170 last year and is 190 this year. What is the inflation rate between these two years?: A)18 percent B)11.8 percent C)10.5 percent D)20 percent E)15.0 percent
B
20.) The fact the consumers substitute one good for another when prices change is: A)a reason why the CPI understates the actual change in the cost of living. B)not taken into account by the fixed market basket used in calculating the CPI. C)not important to economists. D)taken into account by the fixed market basket used in calculating the CPI. E)a reason why the CPI is used to calculate inflation rates.
B
22.) If the price of a soda was 15 cents in 1970, when the CPI was 50, and 50 cents in 2007 when the CPI was 172, then the real price of: A)the soda was 15 cents in 1970 and 50 cents in 2007. B)the 1970 soda in 2007 dollars is 52 cents. C)the 2007 soda in 1970 dollars is $3.44. D)a soda has risen 567 percent. E)a soda has risen 350 percent.
B
26.) Suppose that in 2020, real GDP is larger than nominal GDP. The GDP price index in 2020 is definitely: A)greater than 100. B)less than 100. C)negative. D)less than the GDP price index in 2019. E)larger than the GDP price index in 2019.
B
29.) Which of the following statements about the nominal and the real wage rates is correct?: A)The nominal wage rate equals the real wage rate divided by the CPI and then multiplied by100. B)The real wage rate indicates how many goods and services can be purchased with an hour's labor. C)The real wage rate equals the nominal wage rate multiplied by the CPI then divided by 100. D)The real wage rate is measured in current year dollars.E)The nominal wage rate is measured in the dollars of a base year.
B
2The Consumer Price Index measures the average prices paid by: A) Businesses and consumers for a market basket of goods and services. B) Urban consumers for a fixed market basket of goods and services. C) Businesses for a fixed market basket of resources. D) Urban consumers for the goods and services that most frequently change in price. E) Businesses for the most frequently used basket of resources.
B
37.) If the price of rocket fuel imported from Russia and used by NASA suddenly increases, then theU.S. CPI will ________ and the U.S. GDP deflator will ________.: A)increase; not change B)not change; not change C)increase; increase D)not change; increase E)increase; increase by more than the CPI
B
44.) Uncertainty costs arise from inflation because inflation makes long-term planning ________ so people respond by ________ investment.: A)more difficult; increasing B)more difficult; decreasing C)less difficult; increasing D)less difficult; not changing E)more difficult; not changing
B
46.) Which of the following countries experienced situations close to hyperinflation in the recent past?: A)Great Britain in 2016 B)Venezuela in 2016 C)Japan throughout most of the first decade of the 2000s D)China between 2013 and 2014 E)none of the above
B
