Macro Study Questions Chapter 7

Year CPI 1 100 2 110 3 115 4 120 5 125 The rate of inflation for year 2 is

10 Percent

If the consumer price index in Year X was 300 and the CPI in Year Y was 315, the rate of inflation was

5 percent

If the consumer price index (CPI) is Year X was 300 and the CPI in Year Y was 325, the rate of inflation of year Y was

8 Percent

How would one describe a wage-price spiral?

An increase in nominal wages causes inflation, and inflation causes workers to demand even higher wages in order to keep their real income constant. This cycle can repeat itself.

What is the definition of inflation

An increase in the general (average) price level of goods and services in the economy

Deflation is a (an)

Decrease in the general price level.

Suppose that your income during year X was $50,000, and the CPI for Year X was 150 (base year = Z). Back in year Z your income was 30,000. How was your real income increased or decreased from Z to year X? By how much?

Increased by 33,333

What overstates the consumer price index?

Substitution bias and Improving quality of products

Last year the Harrison family earned $50,000. This year their income is $52,000. In an economy with an inflation rate of 5 percent, what can be said that is true of nominal income and real income?

The Harrison's nominal income has risen, and their real income has fallen.

Inflation is ...

an increase in general price level.

When the inflation rate rises, the purchasing power of nominal income

decreases

Demand-pull inflation is caused by

full employment

Suppose a typical automobile tire cost $50 in the base year and had a useful life of 40,000 miles. Ten years later, the typical automobile tire cost $75 and had a useful life of 75,000 miles. If no adjustment is made for milage the CPI would

overestimate inflation between the two years.

Cost-Pull inflation is due to

resource cost increase

If the nominal rate of interest is less than the inflation rate,

the real interest rate is negative.

Consider an economy with only two goods bread and wine. In the base year, the typical family bought four loaves of bread at $2 per loaf and two bottles of wine for $9 per bottle. IN a given year, bread cost $3 per loaf and wine coat $10 per bottle. The CPI for the given year is...

123

If the bank offers you a nominal interest rate of 9 percent on a student loan, and if inflation is 6 percent, then what is the real interest rate?

3 percent

Suppose you place $10,000 in a retirement fund that earns a nominal interest rate of 8 percent. If you expect inflation to be 5 percent or lower, then you are expecting to earn a real interest rate of at least

3 percent

Year CPI 1 100 2 110 3 115 4 120 5 125 The rate of inflation for year 5 is

4.2 percent