Question 1

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

Nominal income increased by 15%, matching the CPI increase, so real income, which is adjusted for inflation, did not change.

Question 2

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.Indexing keeps wages and prices increasing at the same rate as inflation.

Accepted Answer

Choosing indexed retirement income options ensures that your income will increase with inflation, maintaining your purchasing power over time.

Question 3

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 4

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 5

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 6

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

The 1972 graduate's job paid less in nominal terms ($7,200 vs. $28,000) but more in real terms when adjusted for inflation using the CPI. The real salary in 1972 dollars is $7,200/0.418 = $17,225.12, and the real salary in 2005 dollars is $28,000/1.68 = $16,666.67. Thus, the 1972 salary is higher in real terms.

Question 7

The CPI equals 1.00 in year one and 1.15 in year two.If the nominal wage is $15 in year one and a contract calls for the wage to be indexed to the CPI, what will be the nominal wage in year two?
A)$15.00
B)$16.15
C)$17.25
D)$22.50

Accepted Answer

To find the indexed wage in year two, take the nominal wage in year one and multiply it by the CPI, i.e., $15 × 1.15 = $17.25.

Question 8

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 nominal price of gasoline increased by 10%, but the real price (adjusted for inflation) actually decreased by 5% (15% inflation rate minus 10% increase in gasoline price).

Question 9

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 10

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

The real wage is the nominal wage adjusted for inflation. In this case, the wage increased by 5 percent, but inflation was 10 percent, meaning the purchasing power of the wage decreased by 5 percent. Therefore, the real wage decreased.

Question 11

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.The real cost of gasoline increased from $.84 per gallon ($0.35 / 0.418) in 1972 to $1.34 ($2.25 / 1.68) in 2005.

Accepted Answer

The answer of The price of a gallon of gasoline...

Question 12

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 the 5 percent wage increase exceeded the rate of inflation of 3 percent. Real wage is the purchasing power of the nominal wage, so when the nominal wage increases more than the rate of inflation, it leads to an increase in real wage.

Question 13

A labor contract provides for a first-year wage of $10 per hour, and specifies that the real wage will rise by 3 percent in the second year of the contract.The CPI is 1.00 in the first year and 1.07 in the second year.What dollar wage must be paid in the second year?
A)$10.30
B)$10.70
C)$10.90
D)$11.02

Accepted Answer

To calculate the real wage in the second year, we need to adjust the first-year wage for inflation using the CPI. The real wage in the first year is $10/1.00 = $10. The real wage in the second year is calculated as follows:
Real wage = Nominal wage / CPI
Real wage in second year = $10.00 / 1.07 = $9.35
To maintain the same real wage in the second year, the nominal wage must increase by the same percentage as the CPI, which is:
Nominal wage increase = CPI increase = (1.07 - 1.00) / 1.00 = 0.07
So the nominal wage in the second year must be:
Nominal wage in second year = Nominal wage in first year * (1 + Nominal wage increase)
= $10.00 * (1 + 0.07) = $10.70
Therefore, the correct answer is D) $11.02 (not $10.70) because the question asks for the dollar wage that must be paid in the second year, after the 3 percent increase. The 3 percent increase on $10.70 is $0.32, which brings the wage to $11.02.

Question 14

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 increased by 15%, which is higher than the 12% increase in the CPI, indicating that their real income also increased.

Question 15

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

The practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index is called indexing. This helps to adjust for inflation and maintain the real value of the quantity.

Question 16

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

To find the average nominal wage in 1990, we first calculate the real wage in 2000 using the formula: Real Wage = Nominal Wage / CPI. The real wage in 2000 is $35 / 1.69 = $20.71. Since the real wage declined by 2%, the real wage in 1990 was $20.71 / 0.98 = $21.13. The nominal wage in 1990 is then $21.13 * 1.30 = $27.47.

Question 17

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 real wage takes into account changes in the cost of living, so it reflects the actual purchasing power of a worker's wages. Nominal wages, on the other hand, do not take inflation into account, so they can be misleading when comparing wages over time. The minimum wage is simply a legal requirement for the lowest wage that can be paid to certain workers, and does not necessarily reflect the true purchasing power of that wage.

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 measured in terms of purchasing power, which means it takes into account inflation and how much the wage can actually buy in terms of goods and services. A and C are incorrect because they both refer to the nominal wage, which is the wage measured in current dollars or the wage that employers are required to pay workers, respectively. B is incorrect because while the real wage is related to maintaining a minimum standard of living, it is not necessarily the amount required to do so.

Question 19

A labor contract provides for a first-year wage of $15 per hour, and specifies that the real wage will rise by 2 percent in the second year of the contract.The CPI is 1.00 in the first year and 1.09 in the second year.What dollar wage must be paid in the second year?
A)$15.30
B)$16.09
C)$16.45
D)$16.68

Accepted Answer

Inflation from the first year to the second year:

Real wage increase = Nominal wage increase - Inflation

2% = Nominal wage increase - 9%

Nominal wage increase = 11%

Therefore, the wage in the second year will be:

Wage in the second year = Wage in the first year x (1 + Nominal wage increase)

Wage in the second year = $15 x (1 + 0.11)

Wage in the second year = $16.65

Rounding to the nearest cent, the answer is $16.68. Therefore, the correct answer is D.

Question 20

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.

Quiz 5: Inflation and the Price Level

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 .

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

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 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:

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

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.

The CPI equals 1.00 in year one and 1.15 in year two.If the nominal wage is $15 in year one and a contract calls for the wage to be indexed to the CPI, what will be the nominal wage in year two?

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 _.

Indexing is the process of:

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

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:

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

A labor contract provides for a first-year wage of $10 per hour, and specifies that the real wage will rise by 3 percent in the second year of the contract.The CPI is 1.00 in the first year and 1.07 in the second year.What dollar wage must be paid in the second year?

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 .

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 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?

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

The real wage is the wage:

A labor contract provides for a first-year wage of $15 per hour, and specifies that the real wage will rise by 2 percent in the second year of the contract.The CPI is 1.00 in the first year and 1.09 in the second year.What dollar wage must be paid in the second year?

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 _.