2) “The new goods bias puts a downward bias into the CPI and its measure of the inlation
rate.” Is the previous sentence correct or not? Explain your answer.
Skill: Level 2: Using deinitions
Section: Checkpoint 7.2
Status: Old
AACSB: Written and oral communication
3) What is the commodity substitution bias? What efect does it have on the CPI?
Skill: Level 2: Using deinitions
Section: Checkpoint 7.2
Status: Old
AACSB: Written and oral communication
4) Explain the CPI bias and how it can distort private contracts and increase government
outlays.
Skill: Level 3: Using models
Section: Checkpoint 7.2
Status: Old
AACSB: Written and oral communication
88
5) “The bias in the CPI distorts private contracts because a future payment that is linked to
the CPI will be raised above the true increase in the price level.” Is the previous sentence
true or false?
Skill: Level 3: Using models
Section: Checkpoint 7.2
Status: Old
AACSB: Written and oral communication
6) What, if any, is the impact of the CPI bias on government spending and taxes?
Skill: Level 2: Using deinitions
Section: Checkpoint 7.2
Status: Old
AACSB: Written and oral communication
7.8 Essay: Nominal and Real Values
1) Explain the diference between a nominal value and a real value.
Skill: Level 2: Using deinitions
Section: Checkpoint 7.3
Status: Old
AACSB: Written and oral communication
2) When the nominal price of a good increases over time, must its real price also increase?
Skill: Level 3: Using models
Section: Checkpoint 7.3
Status: Old
AACSB: Written and oral communication
3) What is the diference between nominal variables and real variables? Discuss the
calculations undertaken to determine the real wage rate and the real interest rate. Explain
why the real wage rate and real interest rate are real variables.
89
Skill: Level 5: Critical thinking
Section: Checkpoint 7.3
Status: Old
AACSB: Written and oral communication
4) In 1995, the CPI was 152.5 and the price of an economics textbook was $70.00 and a
music CD was $16.00. If the CPI was 172.3 in 2011, what were the prices of the economics
textbook and the music CD in 2011 dollars?
Skill: Level 3: Using models
Section: Checkpoint 7.3
Status: Old
AACSB: Analytical thinking
5) In 1979, the price of gasoline was $1.389 per gallon and the CPI was 72.6. In 2003, the
price of gasoline was $1.589 per gallon and the CPI was 182.9. Find the real price of
gasoline in 1979 and 2003 in terms of base period dollars.
Skill: Level 3: Using models
Section: Checkpoint 7.3
Status: Old
AACSB: Analytical thinking
6) Scott worked in a large foreign country. He retired in 2008 and his pension income is
ixed at $1,500 per month. The table above gives the CPI in this country. What is the real
monthly value of his pension in the years between 2008 and 2011?
$1,463.41; 2010, $1,415.09; 2011: $1,351.52.
Skill: Level 3: Using models
Section: Checkpoint 7.3
Status: Old
AACSB: Analytical thinking
7) For each of the following values of nominal GDP and real GDP, calculate the GDP price
index.
a. Nominal GDP = $600; real GDP = $800.
b. Nominal GDP = $900; real GDP = $900.
c. Nominal GDP = $1,200; real GDP = $1,000.
Skill: Level 3: Using models
Section: Checkpoint 7.3
Status: Old
AACSB: Analytical thinking
8) If nominal GDP is $230 for a period and real GDP is $200 for the same period, what is
the GDP price index for this period?
Skill: Level 3: Using models
Section: Checkpoint 7.3
Status: Old
AACSB: Analytical thinking
91
9) The table above has real and nominal GDP for two years for a foreign country.
a. What does the GDP price index equal in 2010? What does the value of the GDP price
index tell you about 2010?
b. What does the GDP price index equal in 2011?
Skill: Level 3: Using models
Section: Checkpoint 7.3
Status: Old
AACSB: Analytical thinking
10) Explain how the nominal wage rate is converted into the real wage rate. Explain why
this process of conversion changes the nominal wage rate into the real wage rate.
Skill: Level 3: Using models
Section: Checkpoint 7.3
Status: Old
AACSB: Written and oral communication
11) Deine the nominal wage rate and the real wage rate. Can the nominal wage rate
increase faster than the real wage rate?
Skill: Level 3: Using models
Section: Checkpoint 7.3
Status: Old
AACSB: Written and oral communication
92
12) Suppose the base reference period is 1982-1984. If your nominal wage rate is $8.00 per
hour when the CPI is 180, what is your real wage rate in 1982-1984 dollars?
Skill: Level 3: Using models
Section: Checkpoint 7.3
Status: Old
AACSB: Analytical thinking
13) Deine the nominal interest rate and the real interest rate. Discuss the relationship
between the nominal interest rate and the real interest rate.
Skill: Level 1: Deinition
Section: Checkpoint 7.3
Status: Old
AACSB: Written and oral communication
14) During periods when the inlation rate is positive, how does the real interest rate
compare to the nominal interest rate?
Skill: Level 2: Using deinitions
Section: Checkpoint 7.3
Status: Old
AACSB: Written and oral communication
15) “The real interest rate is found by dividing the nominal interest rate by the CPI.” Is this
statement true or false?
Skill: Level 1: Deinition
Section: Checkpoint 7.3
Status: Old
AACSB: Relective thinking
93
16) Explain how the real interest rate could be negative and how this situation would
beneit the borrower.
Skill: Level 2: Using deinitions
Section: Checkpoint 7.3
Status: Old
AACSB: Written and oral communication
17) In the late 1970s, the inlation rate was over 10 percent per year. Many home mortgage
lending institutions had mortgages outstanding that had been made in the 1960s at
nominal interest rates of around 5 percent per year. Many of these lending institutions
failed. What can explain the high failure rate of lenders in the late 1970s?
Skill: Level 4: Applying models
Section: Checkpoint 7.3
Status: Old
AACSB: Analytical thinking
18) If the nominal interest rate equals 10 percent and the inlation rate equals 6 percent,
what does the real interest rate equal?
Skill: Level 3: Using models
Section: Checkpoint 7.3
Status: Old
AACSB: Analytical thinking
94