Macro Exam 2 (HW 6)

1) The average price of goods and services in the economy is also known as A) the price level. B) the inflation rate. C) a market basket. D) the cost of living

2) The consumer price index is also known as A) cost of a market basket of goods and services typically consumed in the base year. B) cost of a market basket of goods and services typically consumed in the current period. C) average of the prices of the goods and services purchased by a typical urban family of four. D) average of the prices of new final goods and services produced in the economy over a period of time.

Base Year (2006) 2011 Product Quantity Price Price Cokes 100 $0.50 $0.75 Hamburgers 200 2.00 2.50 CDs 10 20.00 21.00 3) Refer to Table above. Assume the market basket for the consumer price index has three products — Cokes, hamburgers, and CDs — with the following values in 2006 and 2011 for price and quantity: The Consumer Price Index for 2011 equals A) 75. B) 93. C) 108. D) 121.

4) The percent increase in the CPI from one year to the next is a measure of the A) GDP deflator. B) unemployment rate. C) real interest rate. D) inflation rate.

5) A consumer price index of 160 in 1996 with a base year of 1982-1984 would mean that the cost of the market basket A) equaled $160 in 1996. B) equaled $160 in 1983. C) rose 160% from the cost of the market basket in the base year. D) rose 60% from the cost of the market basket in the base year.

Year CPI 1996 157 1997 161 1998 163 6) Refer to Table above. Consider the following values of the consumer price index for 1996, 1997, and 1998: The inflation rate for 1997 was equal to A) 1.2 percent. B) 2.0 percent. C) 2.5 percent. D) 4.0 percent.

7) If we want to use a measure of inflation that foreshadows price changes before they affect prices at the retail level, we would base our measure of inflation on A) the producer price index. B) the consumer price index. C) the GDP deflator. D) the household price index.

8) The substitution bias in the consumer price index refers to the idea that consumers ________ the quantity of products they buy in response to price, and the CPI does not reflect this and ________ the cost of the market basket. A) change; over-estimates B) change; under-estimates C) do not change; over-estimates D) do not change; under-estimates

9) The "new product bias" in the consumer price index refers to the idea that A) consumers switch to new goods when the prices of old goods increase, and the CPI overestimates the cost to consumers. B) consumers switch to old goods when the prices of new goods increase, and the CPI underestimates the cost to consumers. C) consumers prefer new goods, even if they are worse in quality than old goods, and this causes the CPI to underestimate the cost to consumers. D) new products' prices often decrease after their initial introduction, and the CPI is adjusted infrequently and overestimates the cost to consumers.

10) To reduce the bias in the consumer price index, the Bureau of Labor Statistics A) updates the market basket every two years, rather than every 10 years. B) updates the market basket every 10 years, rather than every two years. C) incorporates substitutions by consumers when prices of specific products rise rapidly. D) incorporates substitutions by consumers when prices of specific products fall rapidly.

11) You earned $30,000 in 1990, and your salary rose to $80,000 in 2011. If the CPI rose from 82 to 202 between 1990 and 2011, which of the following is true? A) There was deflation between 1990 and 2011. B) The purchasing power of your salary fell between 1990 and 2011. C) The purchasing power of your salary remained constant between 1990 and 2011. D) The purchasing power of your salary increased between 1990 and 2011.

12) Suppose your grandfather earned a salary of $12,000 in 1964. If the CPI is 31 in 1964 and 219 in 2010, then the value of your grandfather's salary in 2010 dollars is approximately A) $84,775. B) $63,830. C) $37,200. D) $26,280.

13) If the nominal rate of interest is 6.5% and the inflation rate is 3.0%, what is the real rate of interest? A) -9.5% B) -3.5% C) 1.5% D) 3.5%

14) Suppose you borrow $1,000 at an interest rate of 12 percent. If the expected real interest rate is 5 percent, then the rate of inflation over the upcoming year that would be most beneficial to you would be a rate of inflation A) equal to 0 percent. B) greater than 7 percent. C) equal to 7 percent. D) less than 7 percent.

15) Which of the following describes a situation in which the person is hurt by inflation? A) a retiree whose pension is adjusted for inflation B) a person who borrows money during a period when inflation is under-predicted C) a person who lends money during a period when inflation is over-predicted D) a person paid a fixed income during an inflationary period

16) The cost to firms of changing prices A) is small even when there is rapid inflation. B) is called a menu cost. C) does not exist if inflation is perfectly anticipated. D) all of the above

17) When actual inflation is less than expected inflation, A) borrowers lose and lenders gain. B) borrowers gain and lenders lose. C) borrowers and lenders both gain. D) borrowers and lenders both lose.

18) The GDP deflator is the best measure that reflects the prices of goods and services purchased by the typical household.

19) Nominal income is equal to real income if the CPI is less than 100.

20) If inflationary expectations are increasing, we would expect that the nominal interest rate would also be increasing, holding all else constant.