True/False
Indicate whether the
statement is true or false.
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1.
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An increase in the price of imported cameras is captured by the Consumer Prices
Index (CPI) but not by the GDP deflator.
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2.
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An increase in the price of helicopters purchased by the UK armed forces is
captured by the Consumer Prices Index (CPI).
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3.
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Because an increase in petrol prices causes consumers to ride their bikes more
and drive their cars less, the Consumer Prices Index (CPI) tends to underestimate the cost of
living.
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4.
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An increase in the price of diamonds will have a greater impact on the Consumer
Prices Index (CPI) than an equal percentage increase in the price of food because diamonds are so
much more expensive.
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5.
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The "base year" in a price index is the benchmark year against which
other years are compared.
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6.
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If the Consumer Prices Index (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.
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7.
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The producer prices index (PPI) is constructed to measure the change in price of
total production.
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8.
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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 Consumer Prices Index (CPI)
tends to overestimate the cost of living.
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9.
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If your wage rises from €500 per week to €625 per week while the
Consumer Prices Index (CPI) rises from 112 to 121, you should feel an increase in your standard
of living.
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10.
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The largest category of goods and services in the Consumer Prices Index
(CPI) is food and non-alcoholic beverages.
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11.
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It is impossible for real interest rates to be negative.
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12.
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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.
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13.
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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.
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14.
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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.
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15.
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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.
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Multiple Choice
Identify the
choice that best completes the statement or answers the question.
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16.
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Inflation can be measured by all of the following except the
a. | All of these answers are used to measure inflation. | b. | consumer prices
index. | c. | producer prices index. | d. | GDP deflator. | e. | finished goods price
index. |
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17.
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The Consumer Prices Index (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 and
household goods. 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. |
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18.
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In 1989, the Consumer Prices Index (CPI) was 124.0. In 1990, it was 130.7. What
was the rate of inflation over this period?
a. | 5.4 per cent | b. | 5.1 per cent | c. | You can't tell
without knowing the base year. | d. | 6.7 per cent | e. | 30.7 per
cent |
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19.
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Which of the following would probably cause the Consumer Prices Index
(CPI) to rise more than the GDP deflator in the UK? An increase in the price of:
a. | BMWs produced in Germany and sold in the UK. | b. | Peugeots produced in
the UK. | c. | helicopters purchased by the Royal Navy. | d. | domestically
produced armoured vehicles sold exclusively to India. |
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20.
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The "basket" on which the Consumer Prices Index (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. | a selection of
consumer goods typically purchased over the last 30 years.. |
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21.
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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 Consumer Prices Index (CPI)
will suffer from
a. | consumer preference bias. | b. | substitution bias. | c. | base year
bias. | d. | bias due to unmeasured quality change. | e. | bias due to the introduction of new
goods. |
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22.
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| Figure 24-1 | | | | The table shows the
prices and the quantities consumed in Carnivore Country. The base year is 2009. This means that 2009
is the year the typical basket was determined so the quantities consumed in 2009 are the only
quantities needed to calculate the Consumer Prices Index (CPI)
in each year. | | | Year | Price of beef | Quantity of beef | Price of pork | Quantity of pork | 2009 | €2.00 | 100 | €1.00 | 100 | 2010 | 2.50 | 90 | 0.90 | 120 | 2011 | 2.75 | 105 | 1.00 | 130 | | | | | |
Refer to Figure 24-1. What is the
value of the basket in the base year? a. | €55 | b. | €300 | c. | €333 | d. | €418.75 | e. | €459.25 |
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23.
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| Figure 24-1 | | | | The table shows the
prices and the quantities consumed in Carnivore Country. The base year is 2009. This means that 2009
is the year the typical basket was determined so the quantities consumed in 2009 are the only
quantities needed to calculate the Consumer Prices Index (CPI)
in each year. | | | Year | Price of beef | Quantity of beef | Price of pork | Quantity of pork | 2009 | €2.00 | 100 | €1.00 | 100 | 2010 | 2.50 | 90 | 0.90 | 120 | 2011 | 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 |
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24.
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| Figure 24-1 | | | | The table shows the
prices and the quantities consumed in Carnivore Country. The base year is 2009. This means that 2009
is the year the typical basket was determined so the quantities consumed in 2009 are the only
quantities needed to calculate the Consumer Prices Index (CPI)
in each year. | | | Year | Price of beef | Quantity of beef | Price of pork | Quantity of pork | 2009 | €2.00 | 100 | €1.00 | 100 | 2010 | 2.50 | 90 | 0.90 | 120 | 2011 | 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 |
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25.
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| Figure 24-1 | | | | The table shows the
prices and the quantities consumed in Carnivore Country. The base year is 2009. This means that 2009
is the year the typical basket was determined so the quantities consumed in 2009 are the only
quantities needed to calculate the Consumer Prices Index (CPI)
in each year. | | | Year | Price of beef | Quantity of beef | Price of pork | Quantity of pork | 2009 | €2.00 | 100 | €1.00 | 100 | 2010 | 2.50 | 90 | 0.90 | 120 | 2011 | 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 |
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26.
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| Figure 24-1 | | | | The table shows the
prices and the quantities consumed in Carnivore Country. The base year is 2009. This means that 2009
is the year the typical basket was determined so the quantities consumed in 2009 are the only
quantities needed to calculate the Consumer Prices Index (CPI)
in each year. | | | Year | Price of beef | Quantity of beef | Price of pork | Quantity of pork | 2009 | €2.00 | 100 | €1.00 | 100 | 2010 | 2.50 | 90 | 0.90 | 120 | 2011 | 2.75 | 105 | 1.00 | 130 | | | | | |
Refer to Figure 24-1. The table shows
that the 2001 inflation rate is biased upward because of a. | 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. |
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27.
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| Figure 24-1 | | | | The table shows the
prices and the quantities consumed in Carnivore Country. The base year is 2009. This means that 2009
is the year the typical basket was determined so the quantities consumed in 2009 are the only
quantities needed to calculate the Consumer Prices Index (CPI)
in each year. | | | Year | Price of beef | Quantity of beef | Price of pork | Quantity of pork | 2009 | €2.00 | 100 | €1.00 | 100 | 2010 | 2.50 | 90 | 0.90 | 120 | 2011 | 2.75 | 105 | 1.00 | 130 | | | | | |
Refer to Figure 24-1. Suppose the base year is changed in the table
from 2009 to 20011 (now use the 2011 consumption basket). What is the new value of the CPI in
2010? a. | 90.6 | b. | 100.0 | c. | 105.4 | d. | 114.7 | e. | 134.3 |
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28.
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Suppose your income rises from €19,000 to €31,000 while the Consumer
Prices Index (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. |
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29.
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If the nominal interest rate is 7 per cent and the inflation rate is 3 per cent,
then the real interest rate is
a. | -4 per cent. | b. | 3 per cent. | c. | 4 per
cent. | d. | 10 per cent. | e. | 21 per cent. |
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30.
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Which of the following statements is correct?
a. | The real interest rate is the sum of the nominal interest rate and the inflation
rate. | b. | The nominal interest rate is the inflation rate minus the real interest
rate. | c. | The nominal interest rate is the real interest rate minus the inflation
rate. | d. | The real interest rate is the nominal interest rate minus the inflation
rate. |
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31.
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If inflation is 8 percent and the real interest rate is 3 percent, then the
nominal interest rate must be
a. | 3/8 per cent. | b. | -5 per cent. | c. | 5 per
cent. | d. | 11 per cent. | e. | 24 per cent. |
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32.
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Under which of the following conditions would you prefer to be the
lender?
a. | The nominal rate of interest is 15 per cent and the inflation rate is 14 per
cent. | b. | The nominal rate of interest is 20 per cent and the inflation rate is 25 per
cent. | c. | The nominal rate of interest is 12 per cent and the inflation rate is 9 per
cent. | d. | The nominal rate of interest is 5 per cent and the inflation rate is 1 per
cent. |
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33.
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Under which of the following conditions would you prefer to be the
borrower?
a. | The nominal rate of interest is 12 per cent and the inflation rate is 9 per
cent. | b. | The nominal rate of interest is 20 per cent and the inflation rate is 25 per
cent. | c. | The nominal rate of interest is 5 per cent and the inflation rate is 1 per
cent. | d. | The nominal rate of interest is 15 per cent and the inflation rate is 14 per
cent. |
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34.
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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. | the interest rate will rise | c. | borrowers will gain
at the expense of lenders. | d. | lenders will gain at the expense of
borrowers. |
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35.
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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. | the interest rate will fall | 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. |
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