Question 1

Which of the following best describes the Consumer Price Index (CPI)?

Accepted Answer

An average of the prices of goods and services purchased by a typical urban family of four, used to measure the overall average price level paid by consumers.

Question 2

Suppose the CPI in Year 1 is 120 and in Year 2 is 132. What is the inflation rate between these two years? Use the formula $$ \pi = \frac{CPI_{2} - CPI_{1}}{CPI_{1}} 	imes 100 .$$

Accepted Answer

10%

Question 3

If the nominal interest rate on a loan is 7% and the inflation rate is 3%, what is the real interest rate? Use the formula $$ r = i - \pi .$$

Accepted Answer

4%

Question 4

Which of the following is NOT a bias that can cause the CPI to overstate inflation?

Accepted Answer

Productivity bias

Question 5

A worker earned $$40,000 in 2000 when the CPI was 172.2. What is the equivalent value of this salary in 2024 dollars if the CPI in 2024 is 309.7? Use the formula $$ 	ext{Value in 2024 dollars} = 	ext{Nominal Value} 	imes \frac{CPI_{2024}}{CPI_{2000}} $.

Accepted Answer

$71,936

Question 6

If actual inflation turns out to be higher than expected inflation, who benefits and who loses?

Accepted Answer

Borrowers benefit and lenders lose.

Question 7

Suppose the price index in Year 1 is 83.8, in Year 2 is 100.0, and in Year 3 is 116.2. What is the inflation rate between Year 2 and Year 3? Use $$ \pi = \frac{116.2 - 100.0}{100.0} 	imes 100 .$$

Accepted Answer

16.2%

Question 8

Which of the following is an example of 'menu costs' caused by inflation?

Accepted Answer

A restaurant having to reprint its menus to reflect higher prices.

Question 9

Why might deflation (a general decrease in average overall prices) be a problem for an economy?

Accepted Answer

Consumers may delay purchases, reducing current consumption and GDP.

Question 10

If the nominal interest rate is 5% and the price level decreases by 2%, what is the real interest rate? Use $$ r = i - \pi $$, where $$ \pi  is $$negative for deflation.

Accepted Answer

7%

Question 11

Which of the following best explains 'shoe leather costs' associated with inflation?

Accepted Answer

The increased effort and time people spend to minimize their cash holdings due to inflation.

Question 12

The Producer Price Index (PPI) is considered a leading indicator for the Consumer Price Index (CPI) because:

Accepted Answer

Changes in producer prices often precede changes in consumer prices.

Question 13

Which of the following would cause the CPI to overstate the true rate of inflation?

Accepted Answer

Consumers substituting cheaper goods for more expensive ones when prices change.

Question 14

A contract is written with an expected inflation rate of 2% and a nominal interest rate of 5%. If actual inflation is 4%, what is the realized real interest rate? Use $$ r = i - \pi .$$

Accepted Answer

1%

Question 15

Which of the following is a direct effect of inflation on tax payments?

Accepted Answer

Investors are taxed on nominal gains, not real gains, leading to higher effective taxes during inflation.

Question 16

If the CPI in 1988 was 120 and the federal minimum wage was $$3.35, what was the real minimum wage in 1982-84 dollars? Use $$ 	ext{Real Wage} = \frac{	ext{Nominal Wage}}{CPI} 	imes 100 $.

Accepted Answer

$2.79

Question 17

Which of the following is a reason why the CPI may not accurately reflect the cost of living for all consumers?

Accepted Answer

The market basket may not match the consumption patterns of all households.

Question 18

If the price index in Year 1 is 100 and in Year 2 is 110, what is the percentage change in the price level? Use $$ \frac{110 - 100}{100} 	imes 100 .$$

Accepted Answer

10%

Question 19

Which of the following statements about anticipated and unanticipated inflation is correct?

Accepted Answer

Unanticipated inflation causes greater redistribution of income than anticipated inflation.

Question 20

A country experiences deflation of 3% and the nominal interest rate is 2%. What is the real interest rate? Use $$ r = i - \pi $$, where $$ \pi  is $$negative for deflation.

Accepted Answer

5%

Measuring Inflation: The Consumer Price Index and Related Concepts

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