Question 1

If the real interest rate is three per cent and the inflation rate is seven per cent, then the nominal interest rate equals:

Accepted Answer

Nominal interest rate = Real interest rate + Inflation rate
Nominal interest rate = 3% + 7% = 10%

Question 2

Harry Porter worked at a library in 1996.A day's work paid him $35.If the price index was 65 in 1990 and 160 in 2011, how much was Harry's daily wage worth in 2011?

Accepted Answer

To adjust Harry's wage from 1996 to its equivalent in 2011, we use the price index (a measure of inflation). The formula for adjusting for inflation is: (Wage in Past Year) * (Price Index in Current Year / Price Index in Past Year). Assuming the price index in 1996 was closer to 65 (1990's index) than to 160 (2011's index), and without the exact index for 1996, we approximate using the given years. The exact adjustment can't be calculated accurately without the 1996 index, but we can estimate the change in purchasing power. The significant increase in the price index from 65 to 160 suggests Harry's $35 in 1996 would buy much less in 2011. However, without doing precise calculations or having the 1996 index, we can't directly compute the exact worth of $35 in 2011 dollars. The choices provided don't directly correlate to this explanation, indicating a need for more information or a different approach to find a precise answer.

Question 3

Suppose that the residents of Fashionland spend all of their income on dresses, hats and shoes.In 2010, they buy four dresses for $800, five hats for $500 and two pairs of shoes for $400.In 2011 they buy five dresses for $900, five hats for $600 and four pairs of shoes for $600.
a.If the base year is 2010, what is the CPI in both years?
b.What is the inflation rate in 2011?

Accepted Answer

The answer of Suppose that the residents of Fashionland spend...

Question 4

On 1 January 2000, Edward invested $10 000 at five per cent interest for one year.The CPI on 1 January 2000 stood at 1.60.On 1 January 2001, the CPI was 1.76.
a.What is the real interest rate?
b.If Edward borrowed the $10 000 from Jack at 10 per cent interest for one year, who benefits and who loses in this situation?

Accepted Answer

The answer of On 1 January 2000, Edward invested $10...

Question 5

If a borrower and lender agree to an interest rate on a loan when inflation is expected to be seven per cent and inflation turns out to be 10 per cent over the life of the loan, then the borrower _____ and the lender ______.

Accepted Answer

When inflation is higher than expected, the real value of the money repaid is less than anticipated, benefiting the borrower (who repays with "cheaper" dollars) and harming the lender (who receives less in real terms).

Question 6

Suppose the value of the CPI is 1.10 in year one, 1.16 in year two, and 1.27 in year three.Assume also that the price of computers increases by three per cent between year one and year two, and by another three per cent between year two and year three.The price level is increasing, the inflation rate is _______, and the relative price of computers is _________.

Accepted Answer

The inflation rate is calculated as the percentage increase in the CPI from one year to the next. Therefore, the inflation rate between year one and year two is [(1.16-1.10)/1.10] x 100% = 5.45%, and the inflation rate between year two and year three is [(1.27-1.16)/1.16] x 100% = 9.48%. Since the inflation rate is increasing, the price level is also increasing. Furthermore, the relative price of computers is decreasing because the price of computers is increasing at a slower rate than the overall price level.

Question 7

Why do economists believe that the CPI overstates inflation?

Accepted Answer

The answer of Why do economists believe that the CPI...

Question 8

In 2010, nominal GDP is $500 million and real GDP is $550 million.What is the GDP deflator?

Accepted Answer

The GDP deflator is calculated as (Nominal GDP / Real GDP) * 100. So, (500 / 550) * 100 = 90.91, which rounds to 91.

Question 9

Masako buys a house in 1999.She obtains a mortgage that carries an annual interest rate of 12 per cent, and makes payments of $880 per month.The CPI in 1999 is 100, in 2000 it is 110, and in 2001 it is 120.What is the inflation rate in 2001?

Accepted Answer

The inflation rate for a given year is calculated as the percentage increase in the CPI from the previous year. For 2001, the CPI increased from 110 to 120. The inflation rate is therefore $\frac{120 - 110}{110} \times 100\% = \frac{10}{110} \times 100\% = 9.09\%$, which rounds to nine per cent.

Question 10

If workers and employers expecting three per cent inflation agree to a three-year wage contract, and inflation turns out to be five per cent, then:

Accepted Answer

When inflation is higher than expected, workers' real wages (purchasing power) decrease because their nominal wage increases do not keep up with the higher prices of goods and services. Employers gain because they can sell their products at higher prices while paying workers wages that were agreed upon before the inflation rate increased.

Question 11

Susan Webster deposits $1000 for a year in a bank account that pays an annual interest rate of 4 per cent.If the inflation rate is 6 per cent, then Susan's purchasing power has approximately:

Accepted Answer

The nominal interest rate Susan receives is 4%. However, when accounting for inflation, the real interest rate is -2% (4% - 6% inflation). This means that the purchasing power of Susan's money has actually decreased by 2%. Therefore, the correct answer is option B: fallen by 2%.

Question 12

Les buys a house in 2009.He obtains a fixed 10 per cent mortgage interest rate, and makes payments of $1000 per month.The 2009 CPI is 90, the 2010 CPI is 90, the 2011 CPI is 100, the 2012 CPI is 110 and the 2013 CPI is 120.
a.What is the real mortgage interest rate Les pays in 2010, 2011, 2012 and 2013?
b.What are the values in 2009 dollars of Les's monthly mortgage payments in 2010, 2011, 2012 and 2013?

Accepted Answer

The answer of Les buys a house in 2009.He obtains...

Question 13

Suppose that the prices of imported consumption goods rose from the base year.Which is the most accurate statement about the CPI and the GDP deflator?

Accepted Answer

The CPI measures the prices of a fixed basket of goods and services consumed by households. If the prices of imported consumption goods rise, the CPI will increase because it includes those imported goods. However, the GDP deflator measures the prices of all goods and services produced domestically, including those that are exported. Therefore, an increase in the prices of imported consumption goods will not affect the GDP deflator.

Question 14

Table 1 shows the following amounts for the years 2010 to 2012. $\begin{array}{|l|l|l|}
\hline \text { Year } & \text { Nominal GDP } & \text { Real GDP } \
\hline 2010 & \$ 500 & \$ 500 \
\hline 2011 & \$ 600 & \$ 545.5 \
\hline 2012 & \$ 720 & \$ 600 \
\hline
\end{array}$ 
Prices in $billions 
a.What is the GDP deflator for the three years?
b.Which is growing faster: nominal GDP or real GDP?

Accepted Answer

The answer of Table 1 shows the following amounts for...

Question 15

Suppose people consume only two goods, apple pies and meat pies:
 $\begin{array}{lllll} 
& \text { 2010 price (\$) } & \text { 2012 quantity } & \text { 2011 price (\$) } & \text { 2011 quantity } \
\text { Apple pies } & 8 & 50 & 10 & 50 \
\text { Meat pies } & 10 & 100 & 12 & 100
\end{array}$ 
a.What is the percentage increase in the price of food and in the price of clothing?
b.What is the percentage increase in the overall price level?
c.Do these price changes affect all consumers to the same extent? Explain.

Accepted Answer

The answer of Suppose people consume only two goods, apple...

Quiz 25: Measuring the Cost of Living