True/False
Indicate whether the
sentence or statement is true or false.
|
|
|
1.
|
An increase in the price of imported cameras is
captured by the CPI but not by the GDP deflator.
|
|
|
2.
|
An increase in the price of helicopters purchased
by the UK armed forces is captured by the CPI.
|
|
|
3.
|
Because an increase in petrol prices causes
consumers to ride their bikes more and drive their cars less, the CPI tends to underestimate the cost
of living.
|
|
|
4.
|
An increase in the price of diamonds will have a
greater impact on the CPI than an equal percentage increase in the price of food because diamonds are
so much more expensive.
|
|
|
5.
|
The "base year" in a price index is the
benchmark year against which other years are compared.
|
|
|
6.
|
If the CPI rises at 5 percent per year, then every
individual in the country needs exactly a 5 percent increase in their income for their standard of
living to remain constant.
|
|
|
7.
|
The producer price index (PPI) is constructed to
measure the change in price of total production.
|
|
|
8.
|
If the Office of National Statistics fails to
recognize that recently produced cars can be driven for many more miles than older models, then the
CPI tends to overestimate the cost of living.
|
|
|
9.
|
If your wage rises from €500 per week to
€625 per week while the CPI rises from 112 to 121, you should feel an increase in your standard
of living.
|
|
|
10.
|
The largest category of goods and services in the
CPI is food and non-alcoholic beverages.
|
|
|
11.
|
It is impossible for real interest rates to be
negative.
|
|
|
12.
|
If the nominal interest rate is 12 percent and the
rate of inflation is 7 percent, then the real rate of interest is 5 percent.
|
|
|
13.
|
If lenders demand a real rate of return of 4
percent and they expect inflation to be 5 percent, then they should charge 9 percent interest when
they extend loans.
|
|
|
14.
|
If borrowers and lenders agree on a nominal
interest rate and inflation turns out to be greater than they had anticipated, lenders will gain at
the expense of borrowers.
|
|
|
15.
|
If workers and firms agree on an increase in wages
based on their expectations of inflation and inflation turns out to be less than they expected,
workers will gain at the expense of firms.
|
Multiple Choice
Identify the
letter of the choice that best completes the statement or answers the question.
|
|
|
16.
|
Inflation can be measured by all of the following
except the
a. | All of these answers are used to measure
inflation. | b. | consumer price
index. | c. | producer price index. | d. | GDP deflator. | e. | finished goods
price index. |
|
|
|
17.
|
The CPI will be most influenced by a 10 percent
increase in the price of which of the following consumption categories?
a. | Clothing and footwear. See Figure 24.1 in the
textbook. | b. | Furniture, household equipment and maintenance. See
Figure 24.1 in the textbook. | c. | Transport. See
Figure 24.1 in the textbook. | d. | Food and
non-alcoholic beverages. See Figure 24.1 in the textbook. | e. | All of these answers would produce the same impact. See Figure 24.1 in
the textbook. |
|
|
|
18.
|
In 1989, the CPI was 124.0. In 1990, it was 130.7.
What was the rate of inflation over this period?
a. | 5.4 percent | b. | 30.7 percent | c. | You can't
tell without knowing the base year. | d. | 5.1
percent | e. | 6.7 percent |
|
|
|
19.
|
Which of the following would probably cause the CPI
to rise more than the GDP deflator in the UK?
a. | An increase in the price of BMWs produced in Germany and
sold in the UK. | b. | An increase in the
price of Peugeots produced in the UK. | c. | An increase in the
price of helicopters purchased by the Royal Navy. | d. | An increase in the price of domestically produced armoured vehicles sold
exclusively to India. |
|
|
|
20.
|
The "basket" on which the CPI is
based is composed of
a. | consumer production. | b. | products purchased by the typical consumer. | c. | raw materials purchased by firms. | d. | total current production. | e. | none of these answers. |
|
|
|
21.
|
If there is an increase in the price of apples
which causes consumers to purchase fewer kilograms of apples and more kilograms of oranges, the CPI
will suffer from
a. | none of these answers. | b. | substitution bias. | c. | base year
bias. | d. | bias due to unmeasured quality
change. | e. | bias due to the introduction of new
goods. |
|
|
|
22.
|
| Figure 24-1 | | | | The table shows the prices and the quantities consumed in
Carnivore Country. The base year is 2000. This means that 2000 is the year the typical basket was
determined so the quantities consumed in 2000 are the only quantities needed to calculate the CPI in
each year. | | | | Year | Price of beef | Quantity of beef | Price of
pork | Quantity of pork | | 2000 | €2.00 | 100 | €1.00 | 100 | | 2001 | 2.50 | 90 | 0.90 | 120 | | 2002 | 2.75 | 105 | 1.00 | 130 | | | | | |
Refer to Figure
24-1. What is the value of the basket in the base year?a. | €459.25 | b. | €418.75 | c. | €300 | d. | none of these
answers | e. | €333 |
|
|
|
23.
|
| Figure 24-1 | | | | The table shows the prices and the quantities consumed in
Carnivore Country. The base year is 2000. This means that 2000 is the year the typical basket was
determined so the quantities consumed in 2000 are the only quantities needed to calculate the CPI in
each year. | | | | Year | Price of beef | Quantity of beef | Price of
pork | Quantity of pork | | 2000 | €2.00 | 100 | €1.00 | 100 | | 2001 | 2.50 | 90 | 0.90 | 120 | | 2002 | 2.75 | 105 | 1.00 | 130 | | | | | |
Refer to Figure
24-1. What are the values of the CPI in 2000, 2001, and 2002, respectively?a. | 83.5, 94.2, 100 | b. | 100, 113.3, 125 | c. | none of these
answers | d. | 100, 111, 139.6 | e. | 100, 109.2, 116 |
|
|
|
24.
|
| Figure 24-1 | | | | The table shows the prices and the quantities consumed in
Carnivore Country. The base year is 2000. This means that 2000 is the year the typical basket was
determined so the quantities consumed in 2000 are the only quantities needed to calculate the CPI in
each year. | | | | Year | Price of beef | Quantity of beef | Price of
pork | Quantity of pork | | 2000 | €2.00 | 100 | €1.00 | 100 | | 2001 | 2.50 | 90 | 0.90 | 120 | | 2002 | 2.75 | 105 | 1.00 | 130 | | | | | |
Refer to Figure
24-1. What is the inflation rate for 2001?a. | 0 percent | b. | 13.3 percent | c. | 11
percent | d. | 9.2 percent | e. | none of these answers |
|
|
|
25.
|
| Figure 24-1 | | | | The table shows the prices and the quantities consumed in
Carnivore Country. The base year is 2000. This means that 2000 is the year the typical basket was
determined so the quantities consumed in 2000 are the only quantities needed to calculate the CPI in
each year. | | | | Year | Price of beef | Quantity of beef | Price of
pork | Quantity of pork | | 2000 | €2.00 | 100 | €1.00 | 100 | | 2001 | 2.50 | 90 | 0.90 | 120 | | 2002 | 2.75 | 105 | 1.00 | 130 | | | | | |
Refer to Figure
24-1. What is the inflation rate for 2002?a. | 10.3 percent | b. | none of these answers | c. | 11
percent | d. | 13.3 percent | e. | 0 percent |
|
|
|
26.
|
| Figure 24-1 | | | | The table shows the prices and the quantities consumed in
Carnivore Country. The base year is 2000. This means that 2000 is the year the typical basket was
determined so the quantities consumed in 2000 are the only quantities needed to calculate the CPI in
each year. | | | | Year | Price of beef | Quantity of beef | Price of
pork | Quantity of pork | | 2000 | €2.00 | 100 | €1.00 | 100 | | 2001 | 2.50 | 90 | 0.90 | 120 | | 2002 | 2.75 | 105 | 1.00 | 130 | | | | | |
Refer to Figure
24-1. The table shows that the 2001 inflation rate is biased upward because ofa. | base year bias. | b. | bias due to the introduction of new goods. | c. | none of these answers. | d. | bias due to
unmeasured quality change. | e. | substitution
bias. |
|
|
|
27.
|
| Figure 24-1 | | | | The table shows the prices and the quantities consumed in
Carnivore Country. The base year is 2000. This means that 2000 is the year the typical basket was
determined so the quantities consumed in 2000 are the only quantities needed to calculate the CPI in
each year. | | | | Year | Price of beef | Quantity of beef | Price of
pork | Quantity of pork | | 2000 | €2.00 | 100 | €1.00 | 100 | | 2001 | 2.50 | 90 | 0.90 | 120 | | 2002 | 2.75 | 105 | 1.00 | 130 | | | | | |
Refer to Figure
24-1. Suppose the base year is changed in the table from 2000 to 2002 (now use the 2002 consumption
basket). What is the new value of the CPI in 2001?a. | 90.6 | b. | 100.0 | c. | none of these
answers | d. | 114.7 | e. | 134.3 |
|
|
|
28.
|
Suppose your income rises from €19,000 to
€31,000 while the CPI rises from 122 to 169. Your standard of living has likely
a. | fallen. | b. | You can't tell without knowing the base year. | c. | risen. | d. | stayed the
same. |
|
|
|
29.
|
If the nominal interest rate is 7 percent and the
inflation rate is 3 percent, then the real interest rate is
a. | 4 percent. | b. | 10 percent. | c. | -4
percent. | d. | 3 percent. | e. | 21 percent. |
|
|
|
30.
|
Which of the following statements is
correct?
a. | none of these answers | b. | The nominal interest rate is the inflation rate minus the real interest
rate. | c. | The real interest rate is the nominal interest rate
minus the inflation rate. | d. | The nominal
interest rate is the real interest rate minus the inflation rate. | e. | The real interest rate is the sum of the nominal interest rate and the
inflation rate. |
|
|
|
31.
|
If inflation is 8 percent and the real interest
rate is 3 percent, then the nominal interest rate must be
a. | 3/8 percent. | b. | 5 percent. | c. | 11
percent. | d. | 24 percent. | e. | -5 percent. |
|
|
|
32.
|
Under which of the following conditions would you
prefer to be the lender?
a. | The nominal rate of interest is 15 percent and the
inflation rate is 14 percent. | b. | The nominal rate
of interest is 20 percent and the inflation rate is 25 percent. | c. | The nominal rate of interest is 12 percent and the inflation rate is 9
percent. | d. | The nominal rate of interest is 5 percent and the
inflation rate is 1 percent. |
|
|
|
33.
|
Under which of the following conditions would you
prefer to be the borrower?
a. | The nominal rate of interest is 12 percent and the
inflation rate is 9 percent. | b. | The nominal rate
of interest is 20 percent and the inflation rate is 25 percent. | c. | The nominal rate of interest is 5 percent and the inflation rate is 1
percent. | d. | The nominal rate of interest is 15 percent and the
inflation rate is 14 percent. |
|
|
|
34.
|
If borrowers and lenders agree on a nominal
interest rate and inflation turns out to be less than they had expected,
a. | neither borrowers nor lenders will gain because the
nominal interest rate has been fixed by contract. | b. | none of these answers | c. | borrowers will
gain at the expense of lenders. | d. | lenders will gain
at the expense of borrowers. |
|
|
|
35.
|
If workers and firms agree on an increase in wages
based on their expectations of inflation and inflation turns out to be more than they
expected,
a. | none of these answers | b. | workers will gain at the expense of firms. | c. | neither workers nor firms will gain because the increase in wages is fixed in
the labour agreement. | d. | firms will gain at
the expense of workers. |
|