Deck 7: The Price Level and Inflation

Question 1

In the following index: 2003 = 123.3;2004 = 145.3;2005 = 111.4;2006 = 100;2007 = 94.3,what is the rate of change from 2006 to 2007?

A) 5.7%
B) 5%
C) 4.3%
D) 2.5%
E) unable to determine

Answer 1

5.7%

Question 2

If the base year for an index is 2005 and the value of the index in 2008 is 165.1,by what percent has the measure grown over those 3 years?

A) 165.1 percent
B) 100.0 percent
C) 6.51 percent
D) 0 percent
E) 65.1 percent

Answer 2

65.1 percent

Question 3

The Consumer Price Index (CPI)excludes goods imported from other countries and consumed by residents of the United States.

Answer 3

False

Question 4

The Consumer Price Index includes the prices of only those goods

A) purchased by consumers
B) purchased by consumers and produced in the United States
C) that are brand new and purchased by consumers
D) purchased by consumers and government
E) purchased by consumers,government and firms

Question 5

If we read that the CPI had value of 120 in 2005,we would know that

A) the typical market basket in 2005 was 20 percent more expensive than in the previous year
B) the typical market basket in 2005 was 120 percent more expensive than in the base year
C) the typical market basket in the base year was 120 percent more expensive than in 2005
D) the typical market basket in 2005 was 20 percent more expensive than in the base year
E) the cost of a loaf of bread is higher now than it has been during the past ten years

Question 6

The CPI includes the prices of

A) goods and services purchased by American consumers
B) goods and services purchased by all consumers (both foreign and domestic)
C) goods and services purchased by the government
D) investment goods purchased by businesses
E) exports purchased by foreign buyers

Question 7

The Consumer Price Index (CPI)

A) measures the prices of all goods produced in the economy
B) includes prices of raw materials
C) is found by averaging the prices of all goods consumed in the economy
D) includes only the prices of domestically produced consumer goods
E) includes the prices of some used consumer goods

Question 8

In the following index,which year is most likely to be the base period: 2003 = 123.3;2004 = 145.3;2005 = 111.4;2006 = 100;2007 = 94.3?

A) 2003
B) 2004
C) 2005
D) 2006
E) 2007

Question 9

If the CPI for 2008 was 112,the typical market basket purchased that year would cost

A) 12 percent more than the same market basket purchased the previous year
B) 112 percent more than the same market basket purchased the previous year
C) 12 percent more than the same market basket purchased in the base year
D) 112 percent more than the same market basket purchased in the base year
E) more than the same market basket purchased during any previous year

Question 10

The Consumer Price Index excludes all of the following,except one.Which one is included in the CPI?

A) Services purchased directly by consumers
B) Raw materials
C) Services purchased by the government
D) Machinery purchased by firms
E) Intermediate goods purchased by firms

Question 11

The Consumer Price Index (CPI)is a weighted average of all the prices paid by households for goods and services.

Question 12

Prices of finished imported goods are

A) not included in the CPI because the goods were produced outside the country
B) not included in the CPI because different countries choose different base periods
C) not included in the CPI because import prices are not denominated in U.S.dollars
D) not included in the CPI because most imports are raw materials
E) included in the CPI

Question 13

The price of a typical basket of goods and services in one period divided by the price of the same basket in a different year is a(n)

A) price index
B) TV-violence index
C) employment index
D) output index
E) unemployment index

Question 14

Which of the following goods and services would be excluded from the CPI?

A) Legal services
B) Used cars
C) French wines sold in the U.S.
D) Restaurant meals
E) Shares of stock in U.S.corporations

Question 15

The prices of which of the following goods would be included in the Consumer Price Index?

A) Fighter planes
B) Iron ore
C) Tennis shoes
D) Firefighters' services
E) IBM stock

Question 16

An index number is important only in a relative sense -- in comparison to an index number from another period.

Question 17

Which of the following prices is least likely to be included in the Consumer Price Index?

A) The price of used bicycles
B) The price of a haircut
C) The price of imported South American grapes
D) The price of a steamroller
E) The price of a loaf of bread

Question 18

If a newspaper reporter wanted to learn about changes in the U.S.price levels,she would probably get that information by looking at the

A) real gross domestic product
B) consumer price index
C) latest press release from the Council of Economic Indicators
D) nominal gross domestic product
E) gross national product

Question 19

Suppose that the Department of Transportation is compiling data on traffic accidents and it wants to present the data in the form of an index.If there were 2,000 accidents in the base year,2007,and 2,100 accidents in 2008,what is the value of the index for 2008?

A) 95.2
B) 100
C) 105
D) 200
E) 210

Question 20

If the Consumer Price Index was 102.2 in 2007 and 104.9 in 2008,we can conclude that

A) the prices of all consumer goods were higher in 2008 than in 2007
B) the prices of all consumer goods were lower in 2008 than in 2007
C) the price level fell from 2007 to 2008
D) the price level rose from 2007 to 2008
E) the base year was 2001

Question 21

Assume that Ernesto earned a nominal wage rate of $15 per hour in 2001,the base year for the CPI.If the CPI in 2002 was 102.6 and his nominal wage rate was $16 per hour,what was his real wage rate in 2001?

A) $14.62
B) $15.00
C) $15.59
D) $16.00
E) His real wage for 2001 cannot be determined with the information given.

Question 22

If the price level is falling,the economy is experiencing

A) creeping inflation
B) stagflation
C) disinflation
D) inflation
E) deflation

Question 23

Assume that the firefighters have gone without a pay increase for 4 years during a tough time in their city's finances.Suppose that things start to look up and the Mayor wants to make up for lost time.If the CPI in 2002 was 125 and 150 in 2006,how much will salaries have to increase to bring the firefighters back up to their real income from 2002?

A) 150.0%
B) 125.0%
C) 20.0%
D) 16.7%
E) 25.0%

Question 24

If we knew that the price of goods rose,on average,by 5 percent last year and by 4 percent this year,we would know

A) nothing about the rate of inflation
B) that the inflation rate is rising
C) that the inflation rate is falling
D) that we are in a stagflation
E) that we are in a recession

Question 25

Which of the following best describes the history of the U.S.price level from 1970 to 2008?

A) The price level increased during the 1970s and 1980s,but decreased during the 1990s.
B) The price level increased during the 1970s but decreased during the 1980s and 1990s.
C) The price level decreased over the whole period.
D) The price level increased over the whole period.
E) The price level increased during the 1970s but decreased during the 1980s,and 1990s.

Question 26

Which of the following is a reason why the Consumer Price Index (CPI)is not calculated as a simple average of all prices?

A) Some goods experience large price changes and the CPI would be too variable if computed by a simple average.
B) Goods differ in their importance in the average consumer's budget.
C) Some goods never experience price changes and the CPI would not be variable enough if computed as a simple average.
D) It would be difficult to compute a price index using a simple average of all prices.
E) Actually,the CPI is a simple average of all prices.

Question 27

Suppose that Colleen's nominal wage rate was $20 per hour in 1998,the base year for the CPI.If the CPI in 2003 was 120.0 and her nominal wage had risen to $22 per hour,what was her real wage in 2003?

A) $16.67
B) $18.33
C) $22.00
D) $26.40
E) her real wage for 2003 cannot be determined with the information given

Question 28

The inflation rate for a given year is found by taking the percentage change in the Consumer Price Index (CPI)from the base year to the year in question.

Question 29

Whenever prices are rising,the inflation rate is rising.

Question 30

Why would workers and retirees want to have their wages and benefits indexed to the Consumer Price Index (CPI)?

A) To lower their purchasing power during years of rising prices
B) To maintain their purchasing power during years of rising output
C) To maintain their purchasing power during years of declining output
D) To increase their purchasing power during years of negative inflation
E) To maintain their purchasing power during years of rising prices

Question 31

When the value of a payment is adjusted in proportion to changes in the CPI,economists refer to that as

A) nominalization
B) realization
C) indexation
D) stabilization
E) depreciation

Question 32

Refer to Figure 7-1.Based on the figure,

A) the price level has fallen since 1965
B) the price level in 1985 was lower than in 1980
C) the price level fell from 1980 to 1990
D) the price level has not fallen since 1965
E) the base year is 1965

Question 33

Which of the following statements is true about the behavior of the CPI?

A) It has risen steadily since 1960.
B) It has fallen steadily since 1960.
C) It fell during the 1960s and has risen ever since.
D) It rose sharply in the 1970s and then declined in the 1980s.
E) It has risen and fallen with roughly equal frequency since 1960.

Question 34

Assume that the professors at a local college have gone without a pay increase for 4 years during a tough time.Suppose that things start to look up and the President of the college wants to make up for lost time.If the CPI in 2002 was 150 and 175 in 2006,how much will salaries have to increase to bring the faculty back up to their real income from 2002?

A) 175.0%
B) 150.0%
C) 25.0%
D) 16.7%
E) 14.3%

Question 35

Suppose that the inflation rate was 4 percent in 2002 and 3 percent in 2003.This would mean that

A) the price level fell from 2002 to 2003
B) the price level fell at a faster rate in 2003 than in 2002
C) the price level rose at a faster rate in 2003 than in 2002
D) the price level rose at a slower rate in 2003 than in 2002
E) all prices in the economy rose at a rate of 3 percent in 2003

Question 36

Refer to Figure 7-1.Based on the figure,

A) since 1990,the price level has fallen
B) the price level was the highest in 1980
C) since 1965,the price level has risen sometimes and fallen other times
D) since 1965,the price level has risen every year
E) cannot tell what has happened to the price level since 1965

Question 37

The real wage can increase only if the nominal wage increases.

Question 38

Which of the following best describes the term deflation?

A) A falling inflation rate
B) A negative price level
C) A negative inflation rate
D) An increasing inflation rate
E) A positive inflation rate

Question 39

Which of the following can happen?

A) Prices are rising and the inflation rate is negative but rising.
B) Prices are falling and the inflation rate is positive and falling.
C) Prices are falling and the inflation rate is positive and rising.
D) Prices are rising and the inflation rate is positive but falling.
E) Prices are rising and the inflation rate is negative and falling.

Question 40

Which of the following is not true about the Consumer Price Index (CPI)?

A) The U.S.income tax system is indexed based on the CPI.
B) The majority of labor union contracts have wages indexed by the CPI.
C) The CPI can be used to transform nominal variables into real variables.
D) The CPI can be used to measure the inflation rate.
E) Social security benefits are indexed by the CPI.

Question 41

In which of the following situations would a person be best off in real terms?

A) Receiving a 10 percent increase in a nominal wage,with an 8 percent rate of inflation in the economy
B) Receiving a 3 percent increase in a nominal wage,with a 0 percent rate of inflation in the economy
C) Receiving a 4 percent increase in a nominal wage,with a 5 percent rate of inflation in the economy
D) Receiving no increase in a nominal wage,with a 5 percent rate of deflation in the economy
E) Receiving a 2 percent decrease in a nominal wage,with a 6 percent rate of deflation in the economy

Question 42

If the Consumer Price Index (CPI)decreases from 100 to 50 and the nominal wage decreases from $200 to $50,what is the change in the real wage in terms of the beginning year's dollars?

A) +$200
B) -$100
C) +$50
D) -$200
E) +$250

Question 43

Which of the following statements is true?

A) Nominal GDP = (price index ÷real GDP)×100
B) Nominal GDP = (real GDP÷price index)× 100
C) Real GDP = (price index ÷ nominal GDP)× 100
D) Real GDP = (nominal GDP ÷price index)× 100
E) Price index = (real GDP÷ nominal GDP)×100

Question 44

Which of the following would be included in the Consumer Price Index but not in the GDP Price Index?

A) The price of a used automobile
B) The price of a dinner in a U.S.restaurant
C) The price of a U.S.-manufactured stereo system
D) The price of an IBM computer
E) The price of a new Ford automobile

Question 45

Which of the following would be included in the GDP Price Index but not in the Consumer Price Index?

A) The price of a Chrysler automobile
B) The price of a fighter aircraft
C) The price of a used computer
D) The price of a tube of toothpaste
E) The price of a bottle of shampoo

Question 46

The index used to translate nominal GDP into real GDP is the

A) Consumer Price Index
B) Wholesale Price Index
C) GDP Price Index
D) Producer Price Index
E) Manufacturer's Input Price Index

Question 47

Economists maintain that the wage rate that workers should really care about is

A) both the real wage rate and the nominal wage rate
B) the nominal wage rate
C) the nominal wage rate multiplied by the real wage rate
D) neither the real wage rate nor the nominal wage rate
E) the real wage rate

Question 48

Suppose workers agreed to a contract that guaranteed a real wage increase of 3 percent per year.If the inflation rate was 7 percent over the following year,what is the required increase in the nominal wage to meet the contract requirements?

A) 10 percent
B) 3 percent
C) 4 percent
D) 7 percent
E) 1 percent

Question 49

Inflation reduces the average real income in the economy and redistributes purchasing power.

Question 50

If the Consumer Price Index (CPI)increases from 100 to 200 and the nominal wage increases from $100 to $400,what is the change in the real wage in terms of the beginning year's dollars?

A) +$200
B) +$400
C) +$100
D) +$300
E) -$200

Question 51

Use the table below to find the real wage in 2007 (in 2006 dollars).

A) $8.06
B) $8.13
C) $8.39
D) $13.00
E) $7.81

Question 52

Suppose you had the following information regarding the economy:

Which of the following best describes the behavior of the real wage rate?

A) It increased from 2001 to 2002 and increased further from 2002 to 2003.
B) It dropped from 2001 to 2002 and then increased from 2002 to 2003.
C) It dropped from 2001 to 2002 and then remained the same from 2002 to 2003.
D) It increased from 2001 to 2002 and then dropped from 2002 to 2003.
E) It remained the same from 2001 to 2002 and then increased from 2002 to 2003.

Question 53

The formula for determining a real variable is real variable =

A) (nominal variable ÷100)× CPI
B) (nominal variable× CPI)÷ 100
C) (nominal variable ÷ price index)×100
D) (nominal variable ÷price index)+ 100
E) (nominal variable÷price index)÷ 100

Question 54

Suppose workers agreed to an indexed contract that increased their nominal wage by 4 percent plus 25 percent of any increase in the Consumer Price Index (CPI).If the CPI increased by 8 percent,what would be the change in the real wage?

A) 4 percent
B) -2 percent
C) 0 percent
D) -4 percent
E) 2 percent

Question 55

If the prices of domestic consumer goods increased while the prices of imported consumer goods decreased,and the demand for each remained the same,which of the following would most likely occur?

A) The GDP price index would decrease while the CPI would increase.
B) Both the GDP price index and the CPI would decrease.
C) The GDP price index would increase more than the CPI.
D) The CPI would increase more than the GDP price index.
E) Both the GDP price index and the CPI would increase by the same amount.

Question 56

If the price of used automobiles increased dramatically relative to all other prices,and the demand for all goods remained the same,which of the following would most likely occur?

A) The GDP price index would decrease less than the CPI.
B) Both the GDP price index and the CPI would decrease.
C) The GDP price index would increase more than the CPI.
D) The CPI would increase more than the GDP price index.
E) Both the GDP price index and the CPI would increase by the same amount.

Question 57

The real wage rate measures

A) nominal wages after taxes
B) what workers are paid in terms of this year's dollars
C) what workers are paid in terms of purchasing power
D) what workers have available for spending after paying their bills
E) the number of dollars earned by workers

Question 58

In which of the following situations would a worker have the greatest real income?

A) She receives a pay cut and her nominal wage falls by 5 percent,while the CPI falls by 20 percent.
B) She receives a pay cut and her nominal wage falls by 5 percent,while the CPI increases by 10 percent.
C) Her nominal wage remains the same,as does the CPI.
D) She receives a raise and her nominal wage increases by 5 percent,while the CPI increases by 10 percent.
E) She receives a raise and her salary increases by 5 percent,while the CPI falls by 5 percent.

Question 59

If prices (as measured by the CPI)tripled and nominal wages tripled,what would happen to real wages?

A) They would triple.
B) They would remain unchanged.
C) They would increase by one-third.
D) They would decrease by one-third.
E) They would increase by a factor of nine.

Question 60

Suppose the Consumer Price Index (CPI)increased by 5 percent over each of the last 5 years while the GDP price index increased by 12 percent annually.Which of the following reasons could explain this difference?

A) Police unions across the country agreed to substantial salary cuts.
B) Import good prices increased relative to domestic good prices.
C) The price of used automobiles increased substantially relative to the prices of other goods.
D) The price of fighter planes dropped due to increased competition in the aerospace industry.
E) The price of investment goods purchased by businesses increased substantially relative to the prices of all other goods.

Question 61

Suppose the nominal interest rate charged is 5 percent and the expected inflation rate is 2 percent.Which of the following is the expected real interest rate?

A) 2 percent
B) 5 percent
C) 7 percent
D) -3 percent
E) 3 percent

Question 62

If you believe that the inflation rate is likely to be high over the next ten years,you would want to

A) have a pension with raises indexed to the CPI if you were going to be retiring
B) obtain a variable rate mortgage
C) not obtain any fixed rate consumer loans
D) pay off all of your existing fixed rate loans
E) be a shareholder of a bank because their profits are going to increase dramatically

Question 63

Which of the following statements about unanticipated inflation is true?

A) It reduces average purchasing power in the economy.
B) It reduces total purchasing power in the economy.
C) It redistributes purchasing power in the economy.
D) It reduces nominal wages.
E) Its effects are spread evenly throughout the economy so that no one gains or loses from inflation.

Question 64

Inflation is harmful to society because it often

A) causes consumers' purchasing power to decline
B) causes sellers' costs to increase
C) causes nominal wages to fall
D) causes purchasing power to be redistributed in haphazard ways
E) has no effect at all on anyone's purchasing power

Question 65

A decline in real income

A) can occur only if there is a decline in nominal income
B) can occur only if there is an increase in the price level
C) can occur only if there is either a decline in nominal income or an increase in the price level
D) cannot occur if there is either an increase in nominal wages or a decline in the price level
E) can occur only if there is a decline in the price level

Question 66

Parvez is trying to decide whether or not he should lend $1,000 to Eli for a year.Eli would pay a fixed nominal interest rate of 8 percent.Parvez expects the inflation rate to be 4 percent for the year.If he does not lend the $1,000 to Eli,Parvez will purchase an indexed savings bond that pays an interest rate of 4 percent,or he will put the money in a (nonindexed)savings account earning 6 percent.Parvez

A) will earn 4 percent in real terms if he loans Eli the money,0 percent in real terms if he buys the bond,and 6 percent in real terms if he puts the money into a savings account
B) is better off holding his money as cash
C) is indifferent between lending the money to Eli and buying the bond because the real interest rate is the same in either case
D) should purchase the bond because it earns the highest real rate of interest
E) earns the highest real rate of interest if he puts his $1,000 into a savings account

Question 67

Everything else constant,who is least likely to lose from unexpected inflation?

A) A retired person whose pension payments are fixed in dollars
B) A person with a large amount of money deposited in a savings account
C) A bank scheduled to receive fixed nominal mortgage payments
D) A homeowner scheduled to make fixed nominal mortgage payments
E) A consumer who spends extra time shopping for the lowest prices

Question 68

Lorrie will receive a nominal wage increase of 10 percent this year.The inflation rate was 5 percent last year and is predicted to be 8 percent this year.If the economic forecast is correct,her real wage this year

A) will increase by approximately 2 percent
B) will increase by approximately 8 percent
C) will increase by approximately 5 percent
D) will remain the same
E) cannot be calculated without knowing the number of dollars by which her wage increases

Question 69

Your friend Shahla argues that inflation is bad for the economy because it lowers everyone's purchasing power.How would an economist respond to Shahla's statement?

A) Her statement is true.
B) Her statement is false because inflation redistributes income but does not change the average level of income in the economy.
C) Her statement is true when everyone's nominal income changes by the same amount.
D) Her statement is true when wages and benefits are not indexed to the CPI.
E) Her statement is true only in a closed economy.

Question 70

If inflation is higher than anticipated and benefits are not indexed,which group loses purchasing power?

A) Borrowers and lenders
B) Lenders and retirees
C) Borrowers and retirees
D) Only borrowers
E) Only lenders

Question 71

If there are no restrictions on contracts,and if all parties in the economy accurately predict the rate of inflation over the next year,then

A) there will be no redistribution of purchasing power
B) purchasing power will be redistributed from wage earners to business owners
C) purchasing power will be redistributed from business owners to wage earners
D) purchasing power will be redistributed from lenders to borrowers
E) purchasing power will be redistributed from borrowers to lenders

Question 72

Suppose the economy includes two distinct groups of people: wage earners and goods sellers.If the price level increases by 50 percent and nominal wages remain unchanged,

A) there will be no redistribution of purchasing power because all private wage earners in the U.S.economy receive indexed wages
B) real wages will remain the same because nominal wages do not change
C) there will be no redistribution of purchasing power because only changes in real income can change the distribution of income
D) income will be redistributed from wage earners to goods sellers
E) income will be redistributed from goods sellers to wage earners

Question 73

A labor union anticipates a 7 percent inflation rate in each of the next three years.It wants to obtain a 3 percent increase in real wages in each of those three years.To obtain this goal,the requisite nominal wage hike it should negotiate is

A) 7 percent each year
B) 3 percent each year
C) 10 percent each year
D) 10 percent the first year and 3 percent each year thereafter
E) 21 percent the first year and 3 percent each year thereafter

Question 74

Economists widely agree that the Consumer Price Index (CPI)understates the true U.S.inflation rate.

Question 75

To approximate the percentage change in real income over any period of time,

A) we need to subtract the percentage change in nominal income from the inflation rate
B) we need to subtract the rate of inflation from the percentage change in nominal income
C) we need to divide the percentage change in nominal income by the inflation rate
D) we need to multiply the change in income by the inflation rate
E) we need to multiply the nominal percentage change in income by the percentage change in inflation rate

Question 76

If inflation is fully anticipated and if there are no restrictions on contracts,then inflation will not redistribute purchasing power.

Question 77

The real interest rate on a loan

A) is the amount that the consumer agrees to pay
B) is always the same as the nominal rate
C) is always greater than the nominal rate
D) is only of concern when serious inflation occurs
E) is the percentage increase in the lender's purchasing power that results from making the loan

Question 78

Jim is negotiating a contract for a labor union.The union wants to increase members' real wages by 4 percent.The inflation rate is predicted to be 7 percent.To attain the union's goal,Jim needs to negotiate a raise in the nominal

A) wage of 4 percent
B) wage of 7 percent
C) wage of 11 percent
D) rate of 3 percent
E) rate of 28 percent

Question 79

If inflation is perfectly anticipated,benefits are indexed,and there are no restrictions on contracts,which group loses purchasing power because of inflation?

A) Borrowers,lenders and retirees
B) Only borrowers
C) Neither lenders,borrowers,nor retirees
D) Only lenders
E) Only retirees

Question 80

Suppose the economy consists of two distinct groups: wage earners and goods sellers.If the price level increases by 30 percent and real wages increase by 30 percent,

A) there will be no redistribution of purchasing power between goods sellers and wage earners
B) purchasing power will be redistributed from wage earners to goods sellers
C) purchasing power will be redistributed from goods sellers to wage earners
D) nominal wages will increase by 90 percent
E) nominal wages will decrease by 60 percent