Question 1

The consumer price index was 200 in 2006 and 210 in 2007. The nominal interest rate during this period was 6.5 percent. What was the real interest rate during this period?

Accepted Answer

A)   1.5 percent
B)   1.75 percent
C)   11.25 percent
D)   11.5 percentE) A) and B)
F) A) and C)

Question 2

Babe Ruth, the famous baseball player, earned $80,000 in 1931. Today, the best baseball players can earn more than 400 times as much as Babe Ruth earned in 1931. However, prices have also risen since 1931. We can conclude that

Accepted Answer

A)   the best baseball players today are about 400 times better off than Babe Ruth was in 1931.
B)   because prices have also risen, the standard of living of baseball stars hasn't changed since 1931.
C)   one cannot make judgments about changes in the standard of living based on changes in prices and changes in incomes.
D)   one cannot determine whether baseball stars today enjoy a higher standard of living than Babe Ruth did in 1931 without additional information regarding increases in prices since 1931.E) None of the above
F) B) and D)

Question 3

The consumer price index was 225 in 2006 and 234 in 2007. The nominal interest rate during this period was 6.5 percent. What was the real interest rate during this period?

Accepted Answer

A)   2.5 percent
B)   4.0 percent
C)   6.76 percent
D)   10.5 percentE) A) and C)
F) A) and B)

Question 4

Table 6-3
The table below pertains to Studious, an economy in which the typical consumer's basket consists of 5 books and 10 calculators.
 
-Refer to Table 6-3. The inflation rate was

Accepted Answer

A)   22.6 percent in 2007 and 12.9 percent in 2008.
B)   25.9 percent in 2007 and 14.8 percent in 2008.
C)   35 percent in 2007 and 14.8 percent in 2008.
D)   35 percent in 2007 and 20 percent in 2008.E) A) and B)
F) A) and C)

Question 5

The price of DVD players increases dramatically, causing a 1 percent increase in the CPI. The price increase will most likely cause the GDP deflator to increase by

Accepted Answer

A)   more than 1 percent.
B)   less than 1 percent.
C)   1 percent.
D)   None of the above is correct; this particular price increase will not affect the GDP deflator.E) All of the above
F) A) and D)

Question 6

Table 6-4
The table below pertains to Wrexington, an economy in which the typical consumer's basket consists of 20 pounds of meat and 10 toys.
 
-Refer to Table 6-4. The cost of the basket

Accepted Answer

A)   increased from 2004 to 2005 and increased from 2005 to 2006.
B)   increased from 2004 to 2005 and decreased from 2005 to 2006.
C)   decreased from 2004 to 2005 and increased from 2005 to 2006.
D)   decreased from 2004 to 2005 and decreased from 2005 to 2006.E) B) and D)
F) C) and D)

Question 7

Table 6-4
The table below pertains to Wrexington, an economy in which the typical consumer's basket consists of 20 pounds of meat and 10 toys.
 
-Refer to Table 6-4. If the base year is 2006, then the inflation rate in 2005 was

Accepted Answer

A)   -44.5%.
B)   -30.8%.
C)   7.7%.
D)   12.5%.E) A) and B)
F) A) and C)

Question 8

If the current year CPI is 140, then the price level has increased 40 percent since the base year.

Accepted Answer

A) True 
 B)False

Question 9

If the price of Italian shoes imported into the United States increases, then

Accepted Answer

A)   both the GDP deflator and the consumer price index will increase.
B)   neither the GDP deflator nor the consumer price index will increase.
C)   the GDP deflator will increase, but the consumer price index will not increase.
D)   the consumer price index will increase, but the GDP deflator will not increase.E) A) and B)
F) A) and C)

Question 10

When the consumer price index is computed, the base year is always the first year among the years being considered.

Accepted Answer

A) True 
 B)False

Question 11

When we express Babe Ruth's 1931 salary in today's dollars and compare his salary to those of current New York Yankee players, we find that the current median salary of today's Yankees is

Accepted Answer

A)   about three quarters of Ruth's salary.
B)   about the same as Ruth's salary.
C)   about twice Ruth's salary.
D)   more than four times Ruth's salary.E) A) and B)
F) A) and C)

Question 12

Which of the following statements about real and nominal interest rates is correct?

Accepted Answer

A)   When the nominal interest rate is rising, the real interest rate is necessarily rising; when the nominal interest rate is falling, the real interest rate is necessarily falling.
B)   If the nominal interest rate is 4 percent and the inflation rate is 3 percent, then the real interest rate is 7 percent.
C)   An increase in the real interest rate is necessarily accompanied by either an increase in the nominal interest rate, an increase in the inflation rate, or both.
D)   When the inflation rate is positive, the nominal interest rate is necessarily greater than the real interest rate.E) B) and C)
F) B) and D)

Question 13

Consider a small economy in which consumers buy only two goods: pretzels and cookies. In order to compute the consumer price index for this economy for two or more consecutive years, we assume that

Accepted Answer

A)   the percentage change in the price of pretzels is equal to the percentage change in the price of cookies from year to year.
B)   the number of pretzels bought by the typical consumer is equal to the number of cookies bought by the typical consumer in each year.
C)   neither the number of pretzels nor the number of cookies bought by the typical consumer changes from year to year.
D)   neither the price of pretzels nor the price of cookies changes from year to year.E) A) and B)
F) A) and C)

Question 14

Suppose that over the past year, the real interest rate was 6 percent and the inflation rate was 4 percent. It follows that

Accepted Answer

A)   the dollar value of savings increased at 6 percent, and the purchasing power of savings increased at 2 percent.
B)   the dollar value of savings increased at 6 percent, and the purchasing power of savings increased at 10 percent.
C)   the dollar value of savings increased at 10 percent, and the purchasing power of savings increased at 2 percent.
D)   the dollar value of savings increased at 10 percent, and the purchasing power of savings increased at 6 percent.E) None of the above
F) All of the above

Question 15

The real interest rate measures the change in dollar amounts.

Accepted Answer

A) True 
 B)False

Question 16

If the nominal interest rate is 8 percent and the rate of inflation is 3 percent, then the real interest rate is

Accepted Answer

A)   -5 percent.
B)   1.67 percent.
C)   5 percent.
D)   11 percent.E) B) and C)
F) All of the above

Question 17

Suppose the price index was 100 in 2004, 118 in 2005, and the inflation rate was lower between 2005 and 2006 than it was between 2004 and 2005. This means that

Accepted Answer

A)   the price index in 2006 was lower than 118.
B)   the price index in 2006 was lower than 136.
C)   the price index in 2006 was lower than 139.24.
D)   the inflation rate between 2005 and 2006 was lower than 1.18 percent.E) A) and C)
F) A) and B)

Question 18

In the basket of goods that is used to compute the consumer price index, the three largest categories of consumer spending are

Accepted Answer

A)   housing, transportation, and recreation.
B)   housing, transportation, and food & beverages.
C)   housing, food & beverages, and education & communication.
D)   housing, medical care, and education & communication.E) A) and B)
F) All of the above

Question 19

The GDP deflator reflects the prices of all goods and services produced around the world, whereas the consumer price index reflects the prices of all goods and services bought by consumers.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 6: Measuring the Cost of Living

Consider a small economy in which consumers buy only two goods: pretzels and cookies. In order to compute the consumer price index for this economy for two or more consecutive years, we assume that

Correct AnswerverifiedShow Answer

When the consumer price index is computed, the base year is always the first year among the years being considered.

Correct AnswerverifiedShow Answer

Babe Ruth, the famous baseball player, earned $80,000 in 1931. Today, the best baseball players can earn more than 400 times as much as Babe Ruth earned in 1931. However, prices have also risen since 1931. We can conclude that

Correct AnswerverifiedShow Answer

In the basket of goods that is used to compute the consumer price index, the three largest categories of consumer spending are

Correct AnswerverifiedShow Answer

If the price of Italian shoes imported into the United States increases, then

Correct AnswerverifiedShow Answer

Table 6-3 The table below pertains to Studious, an economy in which the typical consumer's basket consists of 5 books and 10 calculators. -Refer to Table 6-3. The inflation rate was

Correct AnswerverifiedShow Answer

The consumer price index was 225 in 2006 and 234 in 2007. The nominal interest rate during this period was 6.5 percent. What was the real interest rate during this period?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Suppose the price index was 100 in 2004, 118 in 2005, and the inflation rate was lower between 2005 and 2006 than it was between 2004 and 2005. This means that

Correct AnswerverifiedShow Answer

The GDP deflator reflects the prices of all goods and services produced around the world, whereas the consumer price index reflects the prices of all goods and services bought by consumers.

Correct AnswerverifiedShow Answer

If the current year CPI is 140, then the price level has increased 40 percent since the base year.

Correct AnswerverifiedShow Answer

When we express Babe Ruth's 1931 salary in today's dollars and compare his salary to those of current New York Yankee players, we find that the current median salary of today's Yankees is

Correct AnswerverifiedShow Answer

Table 6-4 The table below pertains to Wrexington, an economy in which the typical consumer's basket consists of 20 pounds of meat and 10 toys. -Refer to Table 6-4. The cost of the basket

Correct AnswerverifiedShow Answer

The real interest rate measures the change in dollar amounts.

Correct AnswerverifiedShow Answer

The consumer price index was 200 in 2006 and 210 in 2007. The nominal interest rate during this period was 6.5 percent. What was the real interest rate during this period?

Correct AnswerverifiedShow Answer

Which of the following statements about real and nominal interest rates is correct?

Correct AnswerverifiedShow Answer

Suppose that over the past year, the real interest rate was 6 percent and the inflation rate was 4 percent. It follows that

Correct AnswerverifiedShow Answer

If the nominal interest rate is 8 percent and the rate of inflation is 3 percent, then the real interest rate is

Correct AnswerverifiedShow Answer

Table 6-4 The table below pertains to Wrexington, an economy in which the typical consumer's basket consists of 20 pounds of meat and 10 toys. -Refer to Table 6-4. If the base year is 2006, then the inflation rate in 2005 was

Correct AnswerverifiedShow Answer

The price of DVD players increases dramatically, causing a 1 percent increase in the CPI. The price increase will most likely cause the GDP deflator to increase by

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified