CH 9 (CPI and Inflation)

If the economy is experiencing​ deflation, A. the nominal interest rate will be lower than the real interest rate. B. high nominal interest rates inflict serious losses on both household and business borrowers. C. the nominal interest rate will be higher than the real interest rate. D. the nominal interest rate will be equal to the real interest rate.

A.

Inflation can affect the distribution of income because A. people with incomes rising faster than the rate of inflation enjoy an increasing purchasing​ power, while people with incomes rising more slowly than the rate of inflation are hurt by a decreasing purchasing power. B. when inflation is fully​ anticipated, mortgage lenders face very high default risk. C. people with fixed​ incomes, such as retired persons who may be receiving a pension of a fixed number of dollars each​ year, are not affected by the inflation​ rate, but people with varying incomes are. D. people with incomes rising slower than the rate of inflation enjoy an increasing purchasing​ power, while people with incomes rising more quickly than the rate of inflation are hurt by a decreasing purchasing power.

A.

The difference between a nominal variable and a real variable is that A. nominal variables are calculated in​ current-year prices and the real variables are measured in dollars of the base year for the price index to correct the effects of inflation. B. real variables are divided by the price index and multiplied by 100 to obtain nominal variables. C. nominal variables are economic variables that are adjusted for​ inflation, whereas real variables are valued in​ today's dollars. D. real variables are calculated in​ current-year prices and the nominal variables are measured in dollars of the base year to adjust for the effects of inflation.

A.

If the inflation rate is 6 percent and the nominal interest rate is 4​ percent, then the real interest rate is A. ​-2 percent, which is the nominal interest rate minus the inflation rate. B. 1.5​ percent, which is the ratio of the nominal interest rate to the inflation rate. C. 2​ percent, which is the inflation rate minus the nominal interest rate. D. 10​ percent, which is the sum of the nominal interest rate and the inflation rate.

A. -2%, which is the inflation rate minus the inflation rate.

If a​ 3-month Treasury bill pays​ 5.5% and the change in the consumer price index​ (CPI) is​ 4.7%, what is the real interest rate​ (the true return to​ lending)? A. ​0.8% B. ​10.2% C. ​4.7% D. ​5.5%

A. 0.8%

Indicate whether the following statement is true or false and why. ​"A wage rising slower than the rate of inflation is actually​ falling." A. False. A higher wage decreases purchasing power regardless of inflation. B. True. If wages are increasing slower than the average price of goods and​ services, purchasing power falls. C. False. A higher wage increases purchasing power regardless of inflation. D. True. If wages are increasing slower than the average price of goods and​ services, purchasing power increases.

B.

The difference between the nominal interest rate and the real interest rate is A. the nominal interest rate is the stated interest rate whereas the real interest rate is the nominal interest rate divided by the inflation rate. B. the nominal interest rate is the stated interest rate whereas the real interest rate is the nominal interest rate minus the inflation rate. C. the nominal interest rate is the stated interest rate whereas the real interest rate is the nominal interest rate plus the inflation rate. D. the real interest rate is the stated interest rate whereas the nominal interest rate is the real interest rate minus the inflation rate.

B.

The type of inflation that is a greater problem to society is A. anticipated inflation because the purchasing power of the dollar falls very rapidly. B. unanticipated​ inflation, since it causes greater redistribution of income between those making payments and those awaiting payments in the future. C. anticipated​ inflation, since people have to pay taxes on the higher nominal income even though the real income has not changed. D. unanticipated​ inflation, since it has some costs associated with​ it, such as menu costs.

B.

Your father earned​ $34,000 per year in 1984. To the nearest​ dollar, what is that equivalent to in 2014 if the CPI in 2014 is 215 and the CPI in 1984 is​ 104? A. ​$73,100 B. ​$70,288 C. ​$34,000 D. ​$16,447

B.

What index is used to measure the average prices paid by a typical​ family? An average of the prices of the goods and services purchased by a typical family is​ the: A. inflation rate index. B. consumer price index​ (CPI). C. aggregate price level index. D. producer price index​ (PPI).

B. consumer price index (CPI)

Of the eight categories in the CPI market​ basket, which three categories make up more than 75 percent of the​ basket? A. medical​ care, recreation, and education B. ​housing, transportation, and food C. food and​ beverages, apparel, and other goods and services D. None of the above. Each category in the basket comprises the same percentage of the basket as the others.

B. housing, transortation and food.

The headline on an article in the Wall Street Journal​ was: "Why Ice Cream is More Important Than Bacon When Tracking​ Inflation." Considering how the CPI is​ constructed, why would ice cream be more important than bacon in calculating​ inflation? A. Ice cream would be more important since it is more representative of a typical market basket for a family of four. B. Ice cream would be more important if consumers spent a higher fraction of their budgets on ice cream than on bacon. C. Ice cream would be more important because the consumption of ice cream is more constant over time. D. Ice cream would be more important because consumer biases for bacon will tend to understate the true inflation rate.

B. ice cream would be more important if consumers spent a higher fraction of their budgets on ice cream than on bacon

Which of the following can give an early warning of future increases in the price​ level? A. Consumer price index B. Producer price index C. GDP deflator D. All of the above

B. producer price index

Menu costs are A. the costs of variable inputs in the long run. B. the costs to firms of changing prices. C. the same as sunk costs. D. the costs of fixed inputs in the short run.

B. the costs to firms of changing prices.

Changes in the CPI overstate the true inflation rate due to four​ "biases." If apple prices rise rapidly during the month while orange prices​ fall, consumers will reduce their apple purchases and increase their orange purchases. Which of the four biases is concerned with this consumer​ behavior? A. the outlet bias B. the substitution bias C. the new product bias D. the increase in quality bias

B. the substitution bias

During a period of​ deflation, which of the following statements is​ true? A. As prices of goods and services decrease during a period of​ deflation, nominal earnings are likely to rise quickly. B. Real earnings will not fall as much as nominal​ earnings, and will rise if the decline in prices is less than the decline in nominal earnings. C. Real average hourly earnings are likely to increase faster than nominal average hourly earnings during a period of deflation. D. All of the above.

C.

If inflation is expected to​ increase, A. the nominal interest rate will remain the same. B. the real interest rate will increase. C. the nominal interest rate will increase. D. the nominal interest rate will decrease.

C.

If the CPI was 207 in 2009 and 225 in​ 2013, what wage would someone who earned a​ $50,000 income in 2009 have to earn in 2013 in order to keep her purchasing power​ constant? A. ​$54,000 B. ​$51,252 C. ​$54,348 D. None of the above.

C.

What impact might a higher minimum wage have on Venezuelan​ workers? A. Increases in the minimum wage could decrease worker motivation and lower worker productivity. B. A rise in the minimum wage could reduce the quantity of labor supplied and create a shortage of labor. C. A higher minimum wage could make jobs hard to find and increase unemployment. D. An increase in the minimum wage could promote employer hiring and create a shortage of labor.

C.

What is the difference between the consumer price index and the producer price​ index? A. The producer price index is an average of the prices of the goods and services purchased by the typical urban family of​ four, whereas the consumer price index is an average of the prices received by producers of goods and services at all stages of the production process. B. The consumer price index is an average of the prices of the goods and services purchased by any urban​ family, whereas the producer price index is an average of the prices received by the retail sector. C. The consumer price index is an average of the prices of the goods and services purchased by the typical urban family of​ four, whereas the producer price index is an average of the prices received by producers of goods and services at all stages of the production process. D. The consumer price index is an average price level equal to nominal GDP divided by real​ GDP, whereas the producer price index is an average of the prices received by the wholesale producers.

C.

What would be a reason why the people of Venezuela would shrug off a rise in the minimum wage of 60​ percent? A. With the extra purchasing power from the wage​ increase, prices would fall and they would experience deflationary conditions. B. They would not be able to spend the extra money and instead need to hold as much paper money as possible. C. Even though their wages were increasing by 60​ percent, prices were increasing by just as much. D. The wage increase would not be enough to offset the redistribution of income that occurred during the hyperinflation.

C.

Suppose that the inflation rateLOADING... turns out to be much lower than most people expected. In that​ case, A. both borrower and lender will lose in this situation. B. both borrower and lender will gain from the situation. C. a borrower will lose from the situation while a lender will gain. D. a lender will lose from the situation while a borrower will gain.

C. a borrower will lose from the situation while a lender will gain.

The price index which is used to measure changes in the cost of living is the A. GDP Deflator. B. Retail Price Index. C. Consumer Price Index​ (CPI). D. Producer Price Index​ (PPI).

C. consumer price index CPI

The BLS surveys​ 30,000 households on their spending habits. The results are used to construct a market basket of goods and services purchased by the typical urban family of four. The chart on the right shows these goods and services grouped into eight broad categories for December 2016. The percentages represent the expenditure shares of the categories within the market basket. Which of the following categories make up about​ three-quarters of the market​ basket? A. medical​ care, housing, and food B. medical​ care, recreation and food C. ​housing, transportation, and food D. ​housing, medical​ care, and education

C. housing, transportation, and food.

The real interest rate A. is the interest rate that is quoted on a financial debt and a​ firm's assets. B. is the interest rate that adjusts GDP for changes in prices. C. is equal to the nominal interest rate minus the inflation rate. D. is equal to the inflation rate minus the nominal interest rate.

C. is equal to the nominal interest rate minus the inflation rate

The real interest rate equals A. the nominal interest rate plus the inflation rate. B. the inflation rate minus the nominal interest rate. C. the nominal interest rate minus the inflation rate. D. the nominal interest rate divided by the CPI for a given year.

C. the nominal interest rate minus the inflation rate.

Which of the following causes changes in the CPI to overstate the true inflation​ rate? A. New product bias B. Substitution bias C. Increase in quality bias D. All of the above

D. all of the above

Even perfectly anticipated inflation imposes costs.​ Why? A. Paper money loses its purchasing power by the rate of inflation. B. Menu costs. C. Some wages will fail to keep up with anticipated inflation. D. All of the above. E. A and C only.

D. all of the above.

For a given positive inflation​ rate, A. the real interest rate is always higher than the nominal interest​ rate, and the real interest rate may be positive or negative. B. the nominal interest rate can be lower than the real interest​ rate, and the real interest rate may be positive or negative. C. the nominal interest rate can be lower than the real interest​ rate, but the nominal interest rate cannot be negative. D. the nominal interest rate is always higher than the real interest​ rate, and the real interest rate may be positive or negative.

D. the nominal interest rate is always higher than the real interest rate, and the real interest rate may be positive or negative.

The BLS collects price statistics from traditional​ full-price retail​ stores, which do not reflect the prices some consumers pay by shopping at discount stores or on the Internet. This is a description of which​ bias? A. the substitution bias B. the increase in quality bias C. the new product bias D. the outlet bias

D. the outlet bias

Computation of the CPI assumes that households buy the same market basket of products each month. For this​ reason, which one of the following factors is not relevant in calculating the​ CPI? A. the prices of the products households purchase in the current year B. the quantities of the products households purchase in the base year C. the prices of the products households purchase in the base year D. the quantities of the products households purchase in the current year

D. the quantities of the products households purchase in the current year.

The internet has_____ the size of menu costs.

reduced

Suppose that Apple and the investors buying the​ firm's bonds both expect a 3 percent inflation rate for the year. ​ Further, suppose the nominal interest rate on bonds is 6 percent and the expected real interest rate is 3 percent. Now suppose that a year after the investors purchase the​ bonds, the inflation rate turns out to be 2 ​percent, rather than the 3 percent that had been expected. In this situation, investors ___ and borrowers ___.

win; lose