CHAPTER 6 MACRO X BROKAH

If the consumer price index was 100 in the base year and 106 in the following year, then the inflation rate was A. 6 percent. B. 10.6 percent. C. 1.06 percent. D. 106 percent.

A. 6 percent.

In which of the following cases would there be an effect on the value of the U.S. consumer price index, but not on the value of the U.S. GDP deflator? A. Most of the bananas that are produced by a certain company in Honduras end up in U.S. grocery stores, and the price of these bananas increases. B. All of the truck tires that are produced by a certain company in South Korea are sold to the U.S. military, and the price of these tires decreases. C. All of the truck tires that are produced by a certain company in California are sold to the U.S. military, and the price of these tires decreases. D. Most of the earth-moving machines that are produced by a certain company in Illinois are exported to other countries, and the price of these machines increases.

A. Most of the bananas that are produced by a certain company in Honduras end up in U.S. grocery stores, and the price of these bananas increases.

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? A. 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 B. The newspaper editorial is correct under all circumstances. C. The newspaper editorial is correct if the market basket consumed by Social Security recipients is the same as the market basket used to compute the CPI. D. The newspaper editorial is incorrect under all circumstances.

A. 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

Which of the following statements is correct about the relationship between the nominal interest rate and the real interest rate? A. The real interest rate is the nominal interest rate minus the rate of inflation. B. The real interest rate is the nominal interest rate plus the rate of inflation. C. The real interest rate is the nominal interest rate divided by the rate of inflation. D. The real interest rate is the nominal interest rate times the rate of inflation.

A. The real interest rate is the nominal interest rate minus the rate of inflation.

The producer price index measures the cost of a basket of goods and services A. bought by firms. B. typically produced in the economy. C. sold by producers. D. produced for a typical consumer.

A. bought by firms.

One of the differences between the GDP deflator and the consumer price index is A. the GDP deflator reflects prices for all goods and services produced domestically and the consumer price index reflects prices for some goods and services bought by consumers. B. the GDP deflator includes income earned by American citizens working in foreign countries and the consumer price index is based solely on purchases made in the U.S. C. the consumer price index includes items not included in the GDP deflator such as airplanes purchased by the Air Force. D. the consumer price index basket of goods is updated constantly by the Bureau of Labor Statistics whereas the GDP deflator is updated only occasionally.

A. the GDP deflator reflects prices for all goods and services produced domestically and the consumer price index reflects prices for some goods and services bought by consumers.

In the CPI, goods and services are weighted according to A. how long a market has existed for each good or service. B. how much consumers buy of each good or service. C. the extent to which each good or service is regarded by the government as a necessity. D. the number of firms that produce and sell each good or service.

B. how much consumers buy of each good or service.

In an imaginary economy, consumers buy only sandwiches and magazines. The fixed basket consists of 20 sandwiches and 30 magazines. In 2006, a sandwich cost $4 and a magazine cost $2. In 2007, a sandwich cost $5. The base year is 2006. If the consumer price index in 2007 was 125, then how much did a magazine cost in 2007? A. $0.83 B. $3.00 C. $2.50 D. $2.25

C. $2.50

Table 24-8 The table below relates to the economy of Mainland, where the typical consumer's market basket consists of 2 televisions and 300 hamburgers. Year Price of a television Price of a hamburger 2013 $600 $2 2014 $550 $3 2015 $500 $2 Refer to Table 24-8. If the base year is 2013, then the economy's inflation rate in 2014 is A. 90 percent. B. 10 percent. C. 11.1 percent. D. 200 percent.

C. 11.1 percent.

The market basket used to calculate the CPI in Aquilonia is 4 loaves of bread, 6 gallons of milk, 2 shirts, and 2 pairs of pants. In 2005, bread cost $1.00 per loaf, milk cost $1.50 per gallon, shirts cost $6.00 each, and pants cost $10.00 per pair. In 2006, bread cost $1.50 per loaf, milk cost $2.00 per gallon, shirts cost $7.00 each, and pants cost $12.00 per pair. Using 2005 as the base year, what was Aquilonia's inflation rate in 2006? A. 4 percent B. 19.6 percent C. 24.4 percent D. 11 percent

C. 24.4 percent

Table 24-3 The table below pertains to Iowan, an economy in which the typical consumer's basket consists of 4 pounds of pork and 3 bushels of corn. Year Price of Pork Price of Corn 2012 $20 per pound $12 per bushel 2013 $25 per pound $18 per bushel Refer to Table 24-3. If 2013 is the base year, then the CPI for 2012 was A. 100.0. B. 116.0. C. 75.3. D. 132.8.

C. 75.3.

An important difference between the GDP deflator and the consumer price index is that A. the GDP deflator reflects the prices of all final goods and services bought by producers and consumers, whereas the consumer price index reflects the prices of all final goods and services bought by consumers. B. the GDP deflator reflects the prices of goods and services bought by producers, whereas the consumer price index reflects the prices of goods and services bought by consumers. C. the GDP deflator reflects the prices of all final goods and services produced domestically, whereas the consumer price index reflects the prices of goods and services bought by consumers. D. the GDP deflator reflects the prices of all final goods and services produced by a nation's citizens, whereas the consumer price index reflects the prices of all final goods and services bought by consumers.

C. the GDP deflator reflects the prices of all final goods and services produced domestically, whereas the consumer price index reflects the prices of goods and services bought by consumers.

Suppose the price of a gallon of ice cream rises from $4 to $5 and the price of a can of coffee rises from $2 to $2.50. If the CPI rises from 150 to 177, then people likely will buy A. more ice cream and more coffee. B. less ice cream and more coffee. C. more ice cream and less coffee. D. less ice cream and less coffee.

D. less ice cream and less coffee.

A decrease in the price of domestically produced industrial robots will be reflected in A. the consumer price index but not in the GDP deflator. B. neither the GDP deflator nor the consumer price index. C. both the GDP deflator and the consumer price index. D. the GDP deflator but not in the consumer price index.

D. the GDP deflator but not in the consumer price index.

If the nominal interest rate is 5 percent and the inflation rate is 2 percent, then the real interest rate is 7 percent. a. TRUE b. FALSE

b. FALSE