Topic 3 Practice Questions

The GDP deflator is an average of prices of _____. A) final goods and services B) just investment goods C) just consumption goods and services D) just imports and exports

Suppose the current value of the CPI is 132. If the inflation rate over the next year is 25%, then a year from now the value of the CPI will be A) 157 B) 165 C) 106 D) 125

Deflation means _____, and disinflation means _____. A) the price level is falling; the inflation rate is falling. B) the inflation rate is falling; the price level is falling. C) both terms mean the price level is falling. D) both terms mean the inflation rate is falling.

Suppose the inflation rate rises unexpectedly. A) Lenders gain and borrowers lose. B) Borrowers gain and lenders lose. C) Everyone gains. D) Everyone loses.

Lenders gain when the inflation rate experiences an A) anticipated increase. B) anticipated decrease. C) unanticipated decrease. D) unanticipated increase.

If the inflation rate exceeds the percentage increase in nominal wages. A) real wages fall. B) real wages rise. C) nominal wages fall. D) nominal wages rise.

Which of the following is correct? A) The GDP deflator is better than the CPI at reflecting the goods and services bought by consumers. B) The CPI is better than the GDP deflator at reflecting the goods and services bought by consumers. C) The GDP deflator and the CPI are equally good at reflecting the goods and services bought by consumers. D) The GDP deflator is more commonly used as a gauge of inflation than the CPI is.

Suppose that from one year to the next, all prices double, and the quantities produced of all final goods and services double. The GDP deflator and the CPI both show _____% inflation, and real GDP increases by _____. A) 100; 100 B) 100; 200 C) 200; 100 D) 200; 200

In the calculation of the CPI, tea is given greater weight than beer if A) the price of tea is higher than the price of beer. B) it costs more to produce tea than it costs to produce beer. C) tea is more readily available than beer to the typical consumer. D) consumers typically buy more tea than beer.

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

A decrease in the price of domestically produced industrial robots will be reflected in A) both the GDP deflator and the consumer price index. B) neither the GDP deflator nor the consumer price index. C) the GDP deflator but not in the consumer price index. D) the consumer price index but not in the GDP deflator.

The nominal interest rate on your bank deposits tells you A) how fast the number of dollars in your bank account rises over time. B) how fast the purchasing power of your bank account rises over time. C) the number of dollars in your bank account today. D) the purchasing power of your bank account today.

The real interest rate on your bank deposits tells you A) how fast the number of dollars in your bank account rises over time. B) how fast the purchasing power of your bank account rises over time. C) the number of dollars in your bank account today. D) the purchasing power of your bank account today.

Which of the following is a reason that the CPI may overstate increases in the cost of living for the average U.S. household? A) Bias due to introduction of new goods B) Bias due to unmeasured quality change C) Substitution bias D) All of the above

The CPI in 1992 was 140, and in 2012 it was 230 (the base year is1982). A nominal income of $50,000 in 1992 had the same purchasing power as a nominal income of $_____ dollars in 2012. A) 30,434 B) $82,143 C) $99,000 D) $45,000

Suppose the current value of the CPI is 132. If the inflation rate over the next year is 25%, then a year from now the value of the CPI will be A) 157 B) 165 C) 106 D) 125

The nominal interest rate is 25%, and the inflation rate is 15%. The real interest rate (ex post or realized) is _____%. A) 7.9 B) 8.7 C) 10 D) 15

A lender thinks inflation is going to be 12% per year. A borrower thinks inflation is going to be 8%. They agree that if there were no inflation, the interest rate on the loan would be 3%. Which of the following is true? The lowest exact nominal interest rate the lender will accept is ______ percent, and the highest exact nominal interest rate the borrower will pay is ______ percent. (Round to the nearest one-tenth of a percentage point.) A) 4; 9 B) 9; 4 C) 3; 0 D) 15; 11