Chapter 17-Inflation

Suppose we shopped for a basket of goods in Year 1 and it cost $350. Suppose the same basket of goods adds up to $385 in Year 2. If we use Year 1 as a base year, what would be the Year 2 CPI?

110

Suppose a market basket of goods and services costs $400 in the base year and $500 this year. The consumer price index (CPI) for this year is:

125

In which of the following years was inflation in the United States the highest?

1980

As shown in Exhibit 7-2, the rate of inflation for Year 5 is:

20 percent.

Suppose hypothetically that the consumer price index (CPI) was 150 in Year 1 and was 180 in Year 2. What would be the inflation rate for this period?

20 percent.

Suppose the consumer price index (CPI) stands at 250 this year. If the inflation rate is 10 percent, then next year's CPI will equal:

275

Suppose your nominal income this year is 5 percent higher than last year. If the inflation rate for the period was 3 percent, then your real income was:

increased by 2 percent.

If the rate of inflation in a given time period turns out to be higher than lenders and borrowers anticipated, then the effect will be:

a redistribution of wealth from lenders to borrowers.

The base year in the consumer price index (CPI) is:

a year chosen as a reference for prices in all other years.

The real interest rate is the annual percentage amount of money that is earned on a sum loaned or deposited in a bank.

False

Suppose a market basket of goods and services costs $1,000 in the base year and the consumer price index (CPI) is currently 110. This indicates the price of the market basket of goods and services is now:

$1,100.

Demand-pull inflation is typically caused by rapidly rising costs of production.

False

Inflation was a major problem in the United States during the early years of the Great Depression.

False

People with fixed incomes fare best in an inflationary period.

False

Suppose the consumer price index (CPI) for a given year is 150. This means the rate of inflation for the given year is 50 percent.

False

The consumer price index (CPI) is computed as the ratio of nominal GDP to real GDP.

False

As the price of gasoline rose during the 1970s, consumers cut back on their use of gasoline relative to other consumer goods. This situation contributed to which bias in the consumer price index?

Substitution bias.

Real income is the purchasing power of nominal (money) income.

True

The real interest rate can be negative.

True

Unlike the GDP deflator, the CPI does not consider goods and services purchased by business and government.

True

If the inflation rate exceeds the nominal rate of interest,

all of these.

Price indexes like the CPI are calculated using a base year. The term base year refers to:

an arbitrarily chosen reference year.

The substitution bias is believed to cause the consumer price index to:

overstate the true rate of inflation.

Suppose the price of gasoline rises and consumers cut back on their use of gasoline relative to other consumer goods. This situation would contribute to which bias in the consumer price index?

substitution bias.

Tina Eckstrom and her husband bought a deferred annuity that started paying them $700 a month in retirement benefits. They, along with millions of other people who live on fixed incomes, are examples of:

the big losers from inflation.