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
