Question 1

Which one of the following groups benefits from inflation?

Accepted Answer

A)  Borrowers.
B)  Savers.
C)  Landlords.
D)  Lenders.

Question 2

Real income in Year X is equal to:

Accepted Answer

A)   
B)   
C)   
D)  Year X nominal income ×CPI.

Question 3

Which of the following would understate the consumer price index?

Accepted Answer

A)  Substitution bias.
B)  Deteriorating quality of products.
C)  Improving quality of products.
D)  Law of demand bias.

Question 4

Exhibit 7-2 Consumer Price Index  As shown in Exhibit 7-2, the rate of inflation for Year 4 is:

Accepted Answer

A)  5 percent.
B)  10 percent.
C)  19 percent.
D)  20 percent.
E)  25 percent.

Question 5

Exhibit 7-1 Consumer Price Index  As shown in Exhibit 7-1, the rate of inflation for Year 5 is:

Accepted Answer

A)  4.2 percent
B)  5 percent.
C)  20 percent.
D)  25 percent.

Question 6

Deflation means a decrease in:

Accepted Answer

A)  the rate of inflation.
B)  the prices of all products in the economy.
C)  homes, autos, and basic resources.
D)  the general level of prices in the economy.

Question 7

If the consumer price index in Year 1 was 200 and the CPI for Year 2 was 230, the rate of inflation was:

Accepted Answer

A)  15 percent.
B)  7.5 percent.
C)  30 percent.
D)  230 percent.

Question 8

The Consumer Price Index compares the:

Accepted Answer

A)  prices of all goods and services in the economy compared to the prices of those goods and services in a base year.
B)  prices of consumer goods and services that a household purchases to the prices of those goods and services purchased in a base year.
C)  prices of producer goods and services that are made for consumers to the prices of those goods and services in a base year.
D)  prices of goods and services that are purchased by producers to the prices of those goods and services in a base year.
E)  prices of goods and services that are purchased by consumer manufacturers to the prices of those goods and services in a base year.

Question 9

Inflation psychosis and wage-price spirals are two types of hyperinflation.

Accepted Answer

A) True 
 B)False

Question 10

If the consumer price index (CPI) in Year 1 was 200 and the CPI in Year 2 was 215, the rate of inflation was:

Accepted Answer

A)  215 percent.
B)  15 percent.
C)  5 percent.
D)  7.5 percent.
E)  8 percent.

Question 11

When the inflation rate rises, the purchasing power of nominal income:

Accepted Answer

A)  remains unchanged.
B)  decreases.
C)  increases.
D)  changes by the inflation rate minus one.

Question 12

Exhibit 7-1 Consumer Price Index  As shown in Exhibit 7-1, the rate of inflation for Year 2 is:

Accepted Answer

A)  5 percent.
B)  10 percent.
C)  20 percent.
D)  25 percent.

Question 13

The consumer price index (CPI)includes only a market basket of goods and services purchased by the typical urban consumer.

Accepted Answer

A) True 
 B)False

Question 14

The real interest rate is defined as the:

Accepted Answer

A)  actual interest rate.
B)  fixed-rate on consumer loans.
C)  nominal interest rate minus the inflation rate.
D)  expected interest rate minus the inflation rate.

Question 15

During periods of inflation, the general price level of goods and services in the economy rises.

Accepted Answer

A) True 
 B)False

Question 16

Consider an economy with only two goods: bread and wine. In 1982, the typical family bought 4 loaves of bread at 50¢ per loaf and 2 bottles of wine for $9 per bottle. In Year X, bread cost 75¢ per loaf and wine cost $10 per bottle. The CPI for Year X (using a 1982 base year) is:

Accepted Answer

A)  100.
B)  115.
C)  126.
D)  130.

Question 17

As inflation drives up prices, people attempt to find substitutes and adjust what they buy. The resulting substitution bias problem causes the CPI to:

Accepted Answer

A)  overstate the impact of higher prices on consumers.
B)  consistently underestimate the true inflation rate.
C)  omit the benefits of product quality improvements.
D)  have larger fluctuations than other price indexes.

Question 18

Suppose the consumer price index (CPI) for Year X is 130. This means the average price of goods and services is:

Accepted Answer

A)  currently $130.
B)  130 percent more in Year X than in the base year.
C)  130 percent more in the base year than in Year X.
D)  priced at 30 percent more in Year X than in the base year.

Question 19

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

Accepted Answer

A)  overstate the true rate of inflation.
B)  understate the true rate of inflation.
C)  understate the true GDP deflator.
D)  none of these.

Question 20

Assume that the real rate of interest is 5 percent and a lender charges a nominal interest rate of 15 percent. If a borrower expects that the rate of inflation next year will be 10 percent and the actual rate of inflation next year is 10 percent,

Accepted Answer

A)  the lender benefits from inflation, while the borrower loses from inflation.
B)  the borrower benefits from inflation, while the lender loses from inflation.
C)  neither the borrower nor the lender benefits from inflation.
D)  both the borrower and the lender lose from inflation.

Exam 7: Inflation

Assume that the real rate of interest is 5 percent and a lender charges a nominal interest rate of 15 percent. If a borrower expects that the rate of inflation next year will be 10 percent and the actual rate of inflation next year is 10 percent,

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As inflation drives up prices, people attempt to find substitutes and adjust what they buy. The resulting substitution bias problem causes the CPI to:

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Which one of the following groups benefits from inflation?

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Deflation means a decrease in:

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If the consumer price index in Year 1 was 200 and the CPI for Year 2 was 230, the rate of inflation was:

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The Consumer Price Index compares the:

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The consumer price index (CPI)includes only a market basket of goods and services purchased by the typical urban consumer.

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If the consumer price index (CPI) in Year 1 was 200 and the CPI in Year 2 was 215, the rate of inflation was:

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Exhibit 7-1 Consumer Price Index As shown in Exhibit 7-1, the rate of inflation for Year 2 is:

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Real income in Year X is equal to:

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Consider an economy with only two goods: bread and wine. In 1982, the typical family bought 4 loaves of bread at 50¢ per loaf and 2 bottles of wine for $9 per bottle. In Year X, bread cost 75¢ per loaf and wine cost $10 per bottle. The CPI for Year X (using a 1982 base year) is:

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Exhibit 7-2 Consumer Price Index As shown in Exhibit 7-2, the rate of inflation for Year 4 is:

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The real interest rate is defined as the:

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Inflation psychosis and wage-price spirals are two types of hyperinflation.

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Exhibit 7-1 Consumer Price Index As shown in Exhibit 7-1, the rate of inflation for Year 5 is:

Correct AnswerverifiedShow Answer

During periods of inflation, the general price level of goods and services in the economy rises.

Correct AnswerverifiedShow Answer

Which of the following would understate the consumer price index?

Correct AnswerverifiedShow Answer

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

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Suppose the consumer price index (CPI) for Year X is 130. This means the average price of goods and services is:

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When the inflation rate rises, the purchasing power of nominal income:

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