Question 1

The country of Myrule has produced the following quantity of gauges and potatoes,with the price of each listed in dollar terms.
  
(a)Using Year 1 as the base year,what is the growth rate of real GDP from Year 1 to Year 2?
(b)Based on the GDP deflator,what is the inflation rate from Year 1 to Year 2?

Accepted Answer

The answer of The country of Myrule has produced the...

Question 2

If the nominal interest rate on a one-year loan was 7%,the expected inflation rate over the year was 3% and the actual inflation rate over the year turned out to be 3.5%,then the expected real interest rate equals
A)6)5%
B)4)0%
C)3)75%.
D)3)5%

Accepted Answer

The expected real interest rate can be calculated as follows:
Real interest rate = (1 + nominal interest rate) / (1 + inflation rate) - 1
Expected real interest rate = (1 + 0.07) / (1 + 0.03) - 1 = 0.039 or 3.9%
Actual real interest rate = (1 + 0.07) / (1 + 0.035) - 1 = 0.032 or 3.2%

Since the actual inflation rate was higher than expected, the actual real interest rate is lower than the expected real interest rate. Therefore, the best answer is B) 4% (since this is the option closest to the actual real interest rate of 3.2%).

Question 3

The Fed prefers to focus on inflation based on which price index?
A)personal consumption expenditures price index
B)consumer price index
C)GDP deflator
D)producer price index

Accepted Answer

The Fed prefers to focus on inflation based on the personal consumption expenditures price index because it is considered to be a more comprehensive and accurate measure of inflation than the Consumer Price Index (CPI). The PCE measures changes in prices of goods and services purchased by households, while the CPI only measures changes in prices of a fixed basket of goods and services. Additionally, the PCE is considered to be more flexible in reflecting changes in consumption patterns over time.

Question 4

The CPI may overstate inflation for all the following reasons except
A)problems measuring changes in the quality of goods.
B)substitution by consumers towards cheaper goods.
C)problems measuring the quality of services.
D)changes in Social Security benefits.

Accepted Answer

Changes in Social Security benefits are not a reason why the CPI may overstate inflation. The other options (problems measuring changes in the quality of goods, substitution by consumers towards cheaper goods, problems measuring the quality of services) are all potential factors that could lead to overstatement of inflation.

Question 5

By how much does the CPI overstate true increases in the cost of living,according to the Boskin Commission? What are the main reasons for this bias in the CPI? What are the economic implications of the bias?

Accepted Answer

The answer of By how much does the CPI overstate...

Question 6

In 2008,expected inflation exceeded inflation.In 2009,inflation exceeded expected inflation.Therefore the real interest rate was ________ than the expected real interest rate in 2008 and the real interest rate was ________ than the expected real interest rate in 2009.
A)less; less
B)less; greater
C)greater; less
D)greater; greater

Accepted Answer

The answer of In 2008,expected inflation exceeded inflation.In 2009,inflation exceeded...

Question 7

In 1975,Richard Petty won the NASCAR race in Richmond,earning $6,265.In 2006,Dale Earnhardt,Jr.,won the race,earning $239,166.The CPI index was 52.5 in 1975 and 198.7 in 2006 (base year = 1982-1984).Calculate the real earnings (based on base year 1982-1984)of both Petty and Earnhardt.

Accepted Answer

The answer of In 1975,Richard Petty won the NASCAR race...

Question 8

Nominal GDP in a country was $8,759.9 billion in 2009 and $9,254.6 billion in 2010.The GDP deflator was 102.86 for 2009 and 104.37 for 2010.
(a)What is the growth rate of nominal GDP between 2009 and 2010?
(b)What is the inflation rate from 2009 to 2010?
(c)What is the growth rate of real GDP from 2009 to 2010?

Accepted Answer

The answer of Nominal GDP in a country was $8,759.9...

Question 9

Loretta agrees to lend Ted $500,000 to buy computers for his consulting firm.They agree to a nominal interest rate of 8%.Both expect the inflation rate to be 2%.
(a)Calculate the expected real interest rate.
(b)If inflation turns out to be 3% over the life of the loan,what is the real interest rate? Who gains from unexpectedly high inflation,Loretta or Ted?
(c)If inflation turns out to be 1% over the life of the loan,what is the real interest rate? Who gains from unexpectedly low inflation,Loretta or Ted?

Accepted Answer

The answer of Loretta agrees to lend Ted $500,000 to...

Question 10

You took out a loan one year ago at a nominal interest rate of 7.5%.The CPI stood at 173.2 at the time and you expected it to rise to 178.6 over the year.Today the CPI is actually 179.5.Calculate the expected real interest rate on the loan and the real interest rate on the loan.

Accepted Answer

The answer of You took out a loan one year...

Question 11

The Federal Reserve focuses on the inflation rate based on the ________ rather than the CPI; to measure the underlying trend in inflation,it focuses on the ________.
A)GDP deflator; overall GDP deflator
B)GDP deflator; core GDP deflator
C)PCE price index; core PCE price index
D)PCE price index; overall PCE price index

Accepted Answer

The Federal Reserve focuses on the Personal Consumption Expenditures (PCE) price index, rather than the Consumer Price Index (CPI), to measure inflation. To measure the underlying trend in inflation, the Fed focuses on the core PCE price index, which excludes volatile food and energy prices. Therefore, choice C is the best answer.

Question 12

By Marks buys a one-year German government bond (called a bund)for $400.He receives principal and interest totaling $436 one year later.During the year the CPI rose from 150 to 162.The nominal interest rate on the bond was ________,and the real interest rate was ________.
A)9%; 1%
B)9%; -1%
C)36%; 24%
D)36%; 12%

Accepted Answer

The nominal interest rate can be calculated by subtracting the principal from the total amount received and then dividing the result by the principal:
Nominal interest rate = ($436 - $400)/$400 = 0.09 or 9%

To calculate the real interest rate, we need to adjust the nominal interest rate for inflation:
Real interest rate = Nominal interest rate - Inflation rate
Inflation rate = (CPI at end of year - CPI at beginning of year)/CPI at beginning of year
Inflation rate = (162 - 150)/150 = 0.08 or 8%

Real interest rate = 0.09 - 0.08 = 0.01 or 1%

Question 13

What is the difference between nominal and real economic variables? Why do economists tend to concentrate on changes in real magnitudes?

Accepted Answer

The answer of What is the difference between nominal and...

Question 14

The nominal interest rate minus the inflation rate is the
A)depreciation rate.
B)real interest rate.
C)discount rate.
D)forward rate.

Accepted Answer

The difference between nominal interest rate and inflation rate is known as the real interest rate. The real interest rate indicates the actual rate of return on an investment after inflation has been taken into account. Therefore, the real interest rate is important for investors to make informed decisions.

Question 15

Historical analysis of real interest rates in the United States shows that
A)real interest rates were unusually low in both the 1970s and 1980s.
B)real interest rates were unusually high in both the 1970s and 1980s.
C)real interest rates were unusually low in the 1970s and unusually high in the 1980s.
D)real interest rates were unusually low in the 1980s,spurring the economic growth that occurred during the Reagan administration.

Accepted Answer

Historical analysis shows that real interest rates were low in the 1970s due to inflationary pressures, and were high in the 1980s due to the Federal Reserve's efforts to curb inflation. Therefore, both decades had unusually low and high real interest rates, respectively.

Question 16

If the expected inflation rate was 2.5%,the expected real interest rate was 4.0%,and the actual inflation rate turned out to be 3.2%,then the real interest rate equals
A)1)7%
B)3)2%
C)3)3%.
D)4)7%

Accepted Answer

Real interest rate = Nominal interest rate - Inflation rate
Expected real interest rate = 4.0% - 2.5% = 1.5%
Actual real interest rate = 4.0% - 3.2% = 0.8%
Therefore, the real interest rate when the actual inflation rate turned out to be 3.2% is 0.8%, which corresponds to option C.

Question 17

The expected real interest rate (r)is equal to
A)nominal interest rate minus inflation rate.
B)nominal interest rate minus expected inflation rate.
C)expected nominal interest rate minus inflation rate.
D)nominal interest rate plus expected inflation rate.

Accepted Answer

The expected real interest rate is the nominal interest rate adjusted for expected inflation. Therefore, it is equal to the nominal interest rate minus the expected inflation rate. Option A is incorrect because it uses the actual inflation rate instead of the expected inflation rate. Option C is incorrect because it has the expected nominal interest rate, which is not used to calculate the real interest rate. Option D is incorrect because it adds the expected inflation rate to the nominal interest rate, which is the opposite of what should be done to calculate the real interest rate.

Question 18

By Marks buys a one-year German government bond (called a bund)for $400.He receives principal and interest totaling $436 one year later.During the year the CPI rose from 150 to 162,but he had thought the CPI would be at 159 by the end of the year.By Marks had expected the real interest rate to be ________,but it actually turned out to be ________.
A)8%; 1%
B)6%; 3%
C)3%; 1%
D)1%; 3%

Accepted Answer

The expected real interest rate is calculated based on the expected inflation rate, while the actual real interest rate is based on the actual inflation rate. Expected inflation was from 150 to 159, a 6% increase (9/150), and actual inflation was from 150 to 162, an 8% increase (12/150). By Marks received a 9% nominal return ($36 on a $400 investment). The expected real interest rate = nominal rate - expected inflation rate = 9% - 6% = 3%. The actual real interest rate = nominal rate - actual inflation rate = 9% - 8% = 1%.

Question 19

In 2008,inflation exceeded expected inflation.In 2009,expected inflation exceeded inflation.Therefore the real interest rate was ________ than the expected real interest rate in 2008 and the real interest rate was ________ than the expected real interest rate in 2009.
A)less; less
B)less; greater
C)greater; less
D)greater; greater

Accepted Answer

Inflation exceeding expected inflation means that the real interest rate is lower than the expected real interest rate. So in 2008, the real interest rate was less than the expected real interest rate. On the other hand, expected inflation exceeding inflation means that the real interest rate is higher than the expected real interest rate. Therefore, in 2009, the real interest rate was greater than the expected real interest rate. So, the answer is B.

Question 20

The nominal interest rate is 7%,today's price level is 150,and you expect the price level to be 156 one year from now.What is the expected inflation rate? What is the expected real interest rate?

Accepted Answer

The answer of The nominal interest rate is 7%,today's price...

Quiz 2: The Measurement and Structure of the National Economy

The country of Myrule has produced the following quantity of gauges and potatoes,with the price of each listed in dollar terms. (a)Using Year 1 as the base year,what is the growth rate of real GDP from Year 1 to Year 2? (b)Based on the GDP deflator,what is the inflation rate from Year 1 to Year 2?

If the nominal interest rate on a one-year loan was 7%,the expected inflation rate over the year was 3% and the actual inflation rate over the year turned out to be 3.5%,then the expected real interest rate equals

The Fed prefers to focus on inflation based on which price index?

The CPI may overstate inflation for all the following reasons except

By how much does the CPI overstate true increases in the cost of living,according to the Boskin Commission? What are the main reasons for this bias in the CPI? What are the economic implications of the bias?

In 2008,expected inflation exceeded inflation.In 2009,inflation exceeded expected inflation.Therefore the real interest rate was than the expected real interest rate in 2008 and the real interest rate was than the expected real interest rate in 2009.

In 1975,Richard Petty won the NASCAR race in Richmond,earning $6,265.In 2006,Dale Earnhardt,Jr.,won the race,earning $239,166.The CPI index was 52.5 in 1975 and 198.7 in 2006 (base year = 1982-1984).Calculate the real earnings (based on base year 1982-1984)of both Petty and Earnhardt.

You took out a loan one year ago at a nominal interest rate of 7.5%.The CPI stood at 173.2 at the time and you expected it to rise to 178.6 over the year.Today the CPI is actually 179.5.Calculate the expected real interest rate on the loan and the real interest rate on the loan.

The Federal Reserve focuses on the inflation rate based on the rather than the CPI; to measure the underlying trend in inflation,it focuses on the .

By Marks buys a one-year German government bond (called a bund) for $400.He receives principal and interest totaling $436 one year later.During the year the CPI rose from 150 to 162.The nominal interest rate on the bond was ,and the real interest rate was .

What is the difference between nominal and real economic variables? Why do economists tend to concentrate on changes in real magnitudes?

The nominal interest rate minus the inflation rate is the

Historical analysis of real interest rates in the United States shows that

If the expected inflation rate was 2.5%,the expected real interest rate was 4.0%,and the actual inflation rate turned out to be 3.2%,then the real interest rate equals

The expected real interest rate (r) is equal to

In 2008,inflation exceeded expected inflation.In 2009,expected inflation exceeded inflation.Therefore the real interest rate was than the expected real interest rate in 2008 and the real interest rate was than the expected real interest rate in 2009.

The nominal interest rate is 7%,today's price level is 150,and you expect the price level to be 156 one year from now.What is the expected inflation rate? What is the expected real interest rate?

Quiz 2: The Measurement and Structure of the National Economy

The country of Myrule has produced the following quantity of gauges and potatoes,with the price of each listed in dollar terms. (a)Using Year 1 as the base year,what is the growth rate of real GDP from Year 1 to Year 2? (b)Based on the GDP deflator,what is the inflation rate from Year 1 to Year 2?

If the nominal interest rate on a one-year loan was 7%,the expected inflation rate over the year was 3% and the actual inflation rate over the year turned out to be 3.5%,then the expected real interest rate equals

The Fed prefers to focus on inflation based on which price index?

The CPI may overstate inflation for all the following reasons except

By how much does the CPI overstate true increases in the cost of living,according to the Boskin Commission? What are the main reasons for this bias in the CPI? What are the economic implications of the bias?

In 2008,expected inflation exceeded inflation.In 2009,inflation exceeded expected inflation.Therefore the real interest rate was ________ than the expected real interest rate in 2008 and the real interest rate was ________ than the expected real interest rate in 2009.

In 1975,Richard Petty won the NASCAR race in Richmond,earning $6,265.In 2006,Dale Earnhardt,Jr.,won the race,earning $239,166.The CPI index was 52.5 in 1975 and 198.7 in 2006 (base year = 1982-1984).Calculate the real earnings (based on base year 1982-1984)of both Petty and Earnhardt.

You took out a loan one year ago at a nominal interest rate of 7.5%.The CPI stood at 173.2 at the time and you expected it to rise to 178.6 over the year.Today the CPI is actually 179.5.Calculate the expected real interest rate on the loan and the real interest rate on the loan.

The Federal Reserve focuses on the inflation rate based on the ________ rather than the CPI; to measure the underlying trend in inflation,it focuses on the ________.

By Marks buys a one-year German government bond (called a bund) for $400.He receives principal and interest totaling $436 one year later.During the year the CPI rose from 150 to 162.The nominal interest rate on the bond was ________,and the real interest rate was ________.

What is the difference between nominal and real economic variables? Why do economists tend to concentrate on changes in real magnitudes?

The nominal interest rate minus the inflation rate is the

Historical analysis of real interest rates in the United States shows that

If the expected inflation rate was 2.5%,the expected real interest rate was 4.0%,and the actual inflation rate turned out to be 3.2%,then the real interest rate equals

The expected real interest rate (r) is equal to

In 2008,inflation exceeded expected inflation.In 2009,expected inflation exceeded inflation.Therefore the real interest rate was ________ than the expected real interest rate in 2008 and the real interest rate was ________ than the expected real interest rate in 2009.

The nominal interest rate is 7%,today's price level is 150,and you expect the price level to be 156 one year from now.What is the expected inflation rate? What is the expected real interest rate?

In 2008,expected inflation exceeded inflation.In 2009,inflation exceeded expected inflation.Therefore the real interest rate was than the expected real interest rate in 2008 and the real interest rate was than the expected real interest rate in 2009.

The Federal Reserve focuses on the inflation rate based on the rather than the CPI; to measure the underlying trend in inflation,it focuses on the .

By Marks buys a one-year German government bond (called a bund) for $400.He receives principal and interest totaling $436 one year later.During the year the CPI rose from 150 to 162.The nominal interest rate on the bond was ,and the real interest rate was .

In 2008,inflation exceeded expected inflation.In 2009,expected inflation exceeded inflation.Therefore the real interest rate was than the expected real interest rate in 2008 and the real interest rate was than the expected real interest rate in 2009.