Question 1

A factory worker earned $10 an hour in 1980.The CPI was 0.82 in 1980.The same factory worker was earning $15 an hour in 1990 when the CPI was 1.31.From 1980 to 1990,the factory worker's hourly real wage:
A)increased from $7.63 to $18.29.
B)decreased from $12.20 to $11.45.
C)remained constant.
D)increased from $10 to $15.

Accepted Answer

Real hourly wage decreased from $12.20 (i.e., $10/0.82)to $11.45 (i.e., $15/1.31).

Question 2

The wage paid to workers measured in terms of real purchasing power is called the:
A)nominal wage.
B)cost of living.
C)minimum wage.
D)real wage.

Accepted Answer

The wage paid to workers in real purchasing power is called the real wage, as it takes into account the effects of inflation on the nominal wage. The nominal wage is the wage paid in current dollars, without adjusting for inflation. The cost of living refers to the amount of money needed to sustain a certain standard of living. The minimum wage is the legally mandated minimum amount that employers must pay their workers.

Question 3

The price of a gallon of gasoline at the pump increased by 5 percent at the same time that the inflation rate was also 5 percent.The nominal price of gasoline _____,and the real price of gasoline _____.
A)did not change;increased
B)did not change;did not change
C)increased;did not change
D)increased;decreased

Accepted Answer

The price of gasoline at the pump increased at the same rate as the general price level, thus while the nominal price increased, the real price was unchanged.

Question 4

Because the minimum wage is not indexed to inflation,when there is inflation,the nominal minimum wage _____,and the real minimum wage _____.
A)remains constant;decreases
B)remains constant;remains constant
C)decreases;remains constant
D)increases;decreases

Accepted Answer

Income that is not indexed to inflation loses purchasing power over time when inflation occurs. In the case of the minimum wage, it is constant in nominal terms but decreases in real terms.

Question 5

The practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index is called:
A)a substitution bias.
B)the Fisher effect.
C)deflating.
D)indexing.

Accepted Answer

This practice is known as indexing, where a nominal quantity (such as wages or pensions) is adjusted to account for inflation by increasing it in line with a specified price index (such as the Consumer Price Index).

Question 6

If the CPI equaled 1.00 in 1995 and 1.65 in 2005 and a typical household's income equaled $35,000 in 1995 and $40,000 in 2005,then between 1995 and 2005,real household income:
A)increased.
B)decreased.
C)was constant.
D)may have either increased or decreased.

Accepted Answer

The answer of If the CPI equaled 1.00 in 1995...

Question 7

Indexing is the process of:
A)dividing a real quantity by a price index.
B)dividing a nominal quantity by a price index.
C)increasing a nominal quantity by an amount equal to the percentage change in a price index.
D)increasing a real quantity by an amount equal to the percentage change in a price index.

Accepted Answer

Indexing is the practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index.

Question 8

The price of a gallon of gasoline was $0.35 in 1972 when the CPI equaled 0.418.The cost of a gallon of gasoline was $2.25 in 2005 when the CPI equaled 1.68.The real cost of a gallon of gasoline between 1972 and 2005:
A)increased.
B)decreased.
C)remained constant.
D)may have either increased or decreased.

Accepted Answer

To calculate the real cost of gasoline, we need to adjust the nominal cost for inflation using the CPI (Consumer Price Index) for each year. We can use the formula: Real cost = (Nominal cost / CPI) * 100.

In 1972, the real cost of gasoline was (0.35 / 0.418) * 100 = $83.73. 
In 2005, the real cost of gasoline was (2.25 / 1.68) * 100 = $133.93.

Therefore, the real cost of gasoline increased from $83.73 in 1972 to $133.93 in 2005, indicating that the answer is (A) increased.

Question 9

A college graduate in 1972 found a job paying $7,200.The CPI was 0.418 in 1972.A college graduate in 2005 found a job paying $28,000.The CPI was 1.68 in 2005.The 1972 graduate's job paid ______ in nominal terms and ______ in real terms than the 2005 graduate's job.
A)more;less
B)more;more
C)less;more
D)less,less

Accepted Answer

To find the answer, we need to adjust 1972 salary into today's dollars using CPI. Then we can make a comparison between the two salaries in real terms.
Using the CPI formula, we get:
1972 salary in today's dollars = 1972 salary x (current CPI/1972 CPI)
= 7,200 x (1.68/0.418)
= $28,911.24
So, the 1972 graduate's job paid more in nominal terms but less in real terms than the 2005 graduate's job. Therefore, the correct answer is C) less; more.

Question 10

If you wish to maintain a constant purchasing power when you retire,you should choose retirement income options that are:
A)deflated.
B)nominal.
C)indexed.
D)inflated.

Accepted Answer

Indexed retirement income options are designed to help maintain a retiree's purchasing power. These options are linked to an inflation index, such as the Consumer Price Index (CPI), which means that retirement income payments will increase to keep pace with inflation. This can help retirees avoid the risk of running out of money due to the rising cost of living.

Question 11

A report indicated that the average real wage in manufacturing declined by 2% between 1990 and 2000.If the CPI equaled 1.30 in 1990,1.69 in 2000,and the average nominal wage in manufacturing was $35 in 2000,what was the average nominal wage in manufacturing in 1990?
A)$21.13
B)$26.40
C)$26.92
D)$27.47

Accepted Answer

The answer of A report indicated that the average real...

Question 12

One family earned an income of $28,000 in 1990.Over the next five years,their income increased by 15%,while the CPI increased by 15%.After five years,this family's nominal income ______,and their real income ______.
A)decreased;also decreased
B)decreased;increased
C)increased;did not change
D)increased;also increased

Accepted Answer

The answer of One family earned an income of $28,000...

Question 13

The price of a gallon of gasoline at the pump increased by 10 percent at the same time that the inflation rate was 15 percent.The nominal price of gasoline _____,and the real price of gasoline _____.
A)increased;also increased
B)increased;decreased
C)increased;did not change
D)decreased;increased

Accepted Answer

The price of gasoline at the pump increased by less than the general price level, thus while the nominal price increased, the real price decreased.

Question 14

A college graduate in 1972 found a job paying $7,200.The CPI was 0.418 in 1972.A college graduate in 2005 found a job paying $30,000.The CPI was 1.68 in 2005.The 1972 graduate's job paid ______ in nominal terms and ______ in real terms than the 2005 graduate's job.
A)more;less
B)more;more
C)less;more
D)less,less

Accepted Answer

The answer of A college graduate in 1972 found a...

Question 15

To ensure that your salary maintains its real purchasing power from year to year,your nominal salary must be:
A)deflated.
B)indexed.
C)aggregated.
D)hyperinflated.

Accepted Answer

To ensure that your salary maintains its real purchasing power from year to year, it must be indexed. This means that your salary is adjusted to reflect changes in the cost of living over time. This is typically done by linking your salary to an inflation index, which measures changes in the prices of goods and services over time. By indexing your salary, you can ensure that you are able to maintain the same standard of living from year to year, even as prices rise due to inflation.

Question 16

If workers received a 5 percent wage increase and the rate of inflation was 10 percent,then their real wage:
A)increased.
B)decreased.
C)remained constant.
D)equaled the nominal wage.

Accepted Answer

While the nominal wage increased by 5 percent, the rate of inflation was higher at 10 percent. This means that the prices of goods and services also increased by 10 percent. Therefore, the purchasing power of the wage increase decreased and the real wage decreased.

Question 17

A year's tuition at a state university cost $250 in 1972 when the CPI equaled 0.418.The cost of a year's tuition at the same state university cost $3,000 in 2005 when the CPI equaled 1.68.The real cost of tuition between 1972 and 2005:
A)increased.
B)decreased.
C)remained constant.
D)may have either increased or decreased.

Accepted Answer

To find the real cost of tuition, we need to adjust the nominal cost for inflation. Using the CPI ratios given, we can calculate the inflation factor as (1.68/0.418) = 4.02. Therefore, the real cost of tuition in 1972 dollars is $250 x 4.02 = $1,005. The real cost of tuition in 2005 dollars is already given as $3,000. Comparing these two values, we can see that the real cost of tuition increased from $1,005 in 1972 to $3,000 in 2005, indicating that the answer is A: the real cost of tuition increased.

Question 18

The real wage is the wage:
A)measured in current dollars.
B)required to maintain a minimum standard of living.
C)employers are required to pay workers.
D)measured in terms of purchasing power.

Accepted Answer

The real wage is the wage measured in terms of purchasing power, meaning it is adjusted for inflation and reflects the actual purchasing power of the wage. A and C are incorrect because they only refer to the nominal wage, which is not adjusted for inflation or purchasing power. B is incorrect because it suggests that there is a specific wage required to maintain a minimum standard of living, which is not necessarily true and may vary depending on individual circumstances.

Question 19

If workers received a 5 percent wage increase and the rate of inflation was 3 percent,then their real wage:
A)increased.
B)decreased.
C)remained constant.
D)equaled the nominal wage.

Accepted Answer

The workers' real wage increased because their nominal wage (the wage increase of 5 percent) exceeded the rate of inflation (3 percent). This means that their purchasing power increased, as their wages grew more than the increase in the cost of goods and services.

Question 20

One family earned an income of $28,000 in 1990.Over the next five years,their income increased by 15%,while the CPI increased by 12%.After five years,this family's nominal income ______,and their real income ______.
A)decreased;also decreased
B)decreased;increased
C)increased;did not change
D)increased;also increased

Accepted Answer

The family's nominal income for 1990 + 15% increase in income over 5 years = $28,000 + ($28,000 x 0.15) = $32,200.
The CPI increased by 12% over the same 5-year period, meaning prices increased. To find the family's real income, we need to adjust their nominal income for inflation using the CPI.
Real Income = Nominal Income / CPI (as a decimal)
Real Income in 1990 = $28,000 / 1.00 = $28,000
Real Income in 1995 = $32,200 / 1.12 = $28,750
Therefore, the family's nominal income increased by $4,200 and their real income increased by $750, so the correct answer is (D) increased; also increased.

Quiz 16: Inflation and the Price Level

A factory worker earned $10 an hour in 1980.The CPI was 0.82 in 1980.The same factory worker was earning $15 an hour in 1990 when the CPI was 1.31.From 1980 to 1990,the factory worker's hourly real wage:

The wage paid to workers measured in terms of real purchasing power is called the:

The price of a gallon of gasoline at the pump increased by 5 percent at the same time that the inflation rate was also 5 percent.The nominal price of gasoline _,and the real price of gasoline _.

Because the minimum wage is not indexed to inflation,when there is inflation,the nominal minimum wage _,and the real minimum wage _.

The practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index is called:

If the CPI equaled 1.00 in 1995 and 1.65 in 2005 and a typical household's income equaled $35,000 in 1995 and $40,000 in 2005,then between 1995 and 2005,real household income:

Indexing is the process of:

The price of a gallon of gasoline was $0.35 in 1972 when the CPI equaled 0.418.The cost of a gallon of gasoline was $2.25 in 2005 when the CPI equaled 1.68.The real cost of a gallon of gasoline between 1972 and 2005:

A college graduate in 1972 found a job paying $7,200.The CPI was 0.418 in 1972.A college graduate in 2005 found a job paying $28,000.The CPI was 1.68 in 2005.The 1972 graduate's job paid in nominal terms and in real terms than the 2005 graduate's job.

If you wish to maintain a constant purchasing power when you retire,you should choose retirement income options that are:

A report indicated that the average real wage in manufacturing declined by 2% between 1990 and 2000.If the CPI equaled 1.30 in 1990,1.69 in 2000,and the average nominal wage in manufacturing was $35 in 2000,what was the average nominal wage in manufacturing in 1990?

One family earned an income of $28,000 in 1990.Over the next five years,their income increased by 15%,while the CPI increased by 15%.After five years,this family's nominal income ,and their real income .

The price of a gallon of gasoline at the pump increased by 10 percent at the same time that the inflation rate was 15 percent.The nominal price of gasoline _,and the real price of gasoline _.

A college graduate in 1972 found a job paying $7,200.The CPI was 0.418 in 1972.A college graduate in 2005 found a job paying $30,000.The CPI was 1.68 in 2005.The 1972 graduate's job paid in nominal terms and in real terms than the 2005 graduate's job.

To ensure that your salary maintains its real purchasing power from year to year,your nominal salary must be:

If workers received a 5 percent wage increase and the rate of inflation was 10 percent,then their real wage:

A year's tuition at a state university cost $250 in 1972 when the CPI equaled 0.418.The cost of a year's tuition at the same state university cost $3,000 in 2005 when the CPI equaled 1.68.The real cost of tuition between 1972 and 2005:

The real wage is the wage:

If workers received a 5 percent wage increase and the rate of inflation was 3 percent,then their real wage:

One family earned an income of $28,000 in 1990.Over the next five years,their income increased by 15%,while the CPI increased by 12%.After five years,this family's nominal income ,and their real income .