105) The natural unemployment rate
A) estimated to be close to 9 percent in recent years in the United States.
B) has been estimated to range between 4 percent and 6 percent in the United States in recent
years.
C) is attained whenever the unemployment rate is less than 5 percent because 95 percent
employment is considered full employment.
D) occurs when 100 percent of the labor force is employed.
106) Cyclical unemployment exists when
A) frictional and structural unemployment is zero.
B) real national income exceeds potential income.
C) real GDP exceeds potential GDP.
D) real GDP is less than potential GDP.
107) When real GDP is ________ potential GDP, the unemployment rate is ________ the
natural unemployment rate.
A) greater than; less than
B) less than; equal to
C) equal to; greater than
D) greater than; greater than
108) Suppose that the unemployment rate equals 4.5 percent and that the natural unemployment
rate is 5.5 percent. We can conclude that
A) the output gap is negative.
B) the output gap equals zero.
C) the output gap is positive.
D) we have mismeasured the natural unemployment rate.
109) In September 2012 the U.S. unemployment rate was 7.8 percent while the natural
unemployment rate was 6 percent. The U.S. economy
A) had a negative output gap.
B) had a positive output gap.
C) had an output gap of zero.
D) was at full employment.
110) When the unemployment rate is less than the natural unemployment rate
A) the output gap is positive.
B) the output gap equals zero.
C) the output gap is negative.
D) None of the above is possible because it is impossible for the unemployment rate to be less
than the natural rate.
111) When more labor is unemployed than the amount at the natural unemployment rate, then
real GDP ________ potential GDP.
A) is equal to
B) is less than
C) is greater than
D) cannot be compared to
112) The unemployment rate generally falls during ________ in the business cycle.
A) a peak
B) a recession
C) a trough
D) an expansion
113) At the natural unemployment rate, there is no
A) frictional unemployment.
B) structural unemployment.
C) cyclical unemployment.
D) unemployment.
114) If the economy is at full employment
A) the entire population is employed.
B) the entire labor force is employed.
C) the only unemployment is frictional unemployment plus discouraged workers.
3 The Price Level, Inflation, and Deflation
1) An increase in the price level is defined as
A) a recession.
B) a growth boom.
C) inflation.
D) an expansion.
2) Inflation is a problem when
A) it is unpredictable.
B) it causes the value of money to vary unpredictably.
C) it causes resources to be diverted from productive uses.
D) All of the above answers are correct.
3) Unpredictable changes in the value of money, which brings about gains and losses, are a
consequence of unpredictable changes in
A) real GDP.
B) unemployment rate.
C) inflation.
D) productivity.
4) The cost of inflation to society includes
I. the opportunity costs of resources used by people to protect themselves against inflation.
II. the diversion of productive resources to forecasting inflation.
A) I only
B) II only
C) both I and II
D) neither I nor II
5) The cost of inflation to society includes
A) unpredictable changes in the value of money.
B) higher interest rates paid by borrowers.
C) higher interest rates paid by the government on its debt.
D) the lost spending when people do not have enough money.
6) In a period of rapid, unexpected inflation, resources can be lost
A) when firms invest in research and development instead of forecasting inflation.
B) when firms use resources to forecast inflation.
C) because rapid inflation almost always turns into a hyperinflation.
D) Both answers B and C are correct.
7) Hyperinflation is defined as
A) declining inflation rates.
B) rising but low inflation rates.
C) very high inflation rates.
D) very low inflation rates.
8) The Consumer Price Index is a measure of the average of the prices paid by ________ for a
fixed basket of consumer goods and services.
A) urban consumers
B) all consumers
C) urban wage earners and clerical workers
D) consumers living in cities with a population greater than 100,000
9) The first step in measuring the CPI is to
A) select the market basket.
B) conduct a monthly survey.
C) collect prices for the basket of goods and services.
D) interview businesses.
10) The consumer price index (CPI)
A) compares the cost of the typical basket of goods consumed in period 1 to the cost of a basket
of goods typically consumed in period 2.
B) compares the cost in the current period to the cost in a reference base period of a basket of
goods typically consumed in the base period.
C) measures the increase in the prices of the goods included in GDP.
D) is the ratio of the average price of a typical basket of goods to the cost of producing those
goods.
11) If the basket of goods and services used to calculate the CPI cost $200 in the reference base
period and $450 in a later year, the CPI for the latter year equals
A) 200.
B) 225.
C) 325.
D) 450.
12) If the CPI basket costs $35 in the base period but costs $42, what is the CPI in the next
period?
A) 83.3
B) $42
C) 20 percent
D) 120
13) Suppose the Consumer Price Index is 143.6. What does that number mean?
A) On average, goods cost $143.60.
B) On average, goods cost $243.60.
C) Prices rose 143.6 percent over the reference base period, on average.
D) Prices rose 43.6 percent over the reference base period, on average.
14) If the CPI is 120, this means that
A) prices are 120 percent higher than in the reference base period.
B) prices are 0.12 times higher than in the reference base period.
C) prices are 20 percent higher than in the reference base period.
D) the inflation rate must be positive.
CPI basket
quantity
2009 price
2015 price
Blu-rays
10 discs
$16 per disc
$12 per disc
Bottled
water
200 bottles
$1.00 per
bottle
$1.25 per
bottle
15) If 2009 is the reference base period, what is the price index for the CPI basket of goods for
2015 in the above table?
A) 97.3
B) 102.8
C) 128.0
D) zero because the price of Blu-rays fell and the price of water increased
2012 2013
Item
Quantity
Price
Price
Movie tickets
4
$5.00
$7.50
Bags of
popcorn
2
$3.00
$3.00
Drinks of soda
4
$1.00
$1.50
16) The information in the table above gives the 2012 reference base period CPI basket and
prices used to construct the CPI for a small nation. It also has the 2013 prices. What is the value
of the CPI for the reference base period, 2012?
A) 140
B) 133
C) 100
D) 75
17) The information in the table above gives the 2012 reference base period CPI basket and
prices used to construct the CPI for a small nation. It also has the 2013 prices. What is the value
of the CPI for 2013?
A) 140
B) 133
C) 100
D) 75
18) The CPI basket contains 400 oranges and 800 pens. In the base year, the price of an orange is
$1.00 and the price of a pen is $0.75. This year, urban consumers each buy 300 oranges at $2.00
each and 850 pens at $1.00 each. The CPI this year is ________.
A) 1.60
B) 62.5
C) 160
D) 140
19) If the CPI basket of goods cost $200 in the reference base period and $450 in a later year, the
CPI in the later year equals
A) 225.
B) 250.
C) 300.
D) 450.
20) Using the notation Pt to designate this period’s price level and Pt-1 to designate last period’s
price level, the formula for measuring the inflation rate from last period to this period is
A) [(Pt – Pt – 1) / Pt] × 100.
B) [(Pt -1 – Pt) / Pt – 1] × 100.
C) [(Pt – Pt – 1) / Pt – 1] × 100.
D) [(Pt -1 – Pt) / Pt] × 100.
21) Suppose the CPI last year is 121 and the CPI this year is 137. The CORRECT method to
calculate the inflation rate is
A) (137 – 121)/100 = 0.16.
B) 137 × 121 = 258.
C) [(137 – 121)/121] × 100 = 13.2.
D) (137/121) × 100 = 113.2.
22) If the CPI was 132.5 at the end of last year and 140.2 at the end of this year, the inflation rate
over these two years was
A) 7.7 percent.
B) 5.4 percent.
C) 4.4 percent.
D) 5.8 percent.
23) If the CPI was 121.5 at the end of last year and 138.3 at the end of this year, the inflation rate
over these two years was
A) 10.2 percent.
B) 13.8 percent.
C) 12.2 percent.
D) 16.8 percent.
24) If the CPI was 122.3 at the end of last year and 124.5 at the end of this year, the inflation rate
over these two years was
A) 1.8 percent.
B) 2.5 percent.
C) 22.5 percent.
D) 18.0 percent.
25) If the CPI was 132.5 at the end of last year and 137.5 at the end of this year, the inflation rate
over these two years was
A) 3.6 percent.
B) 3.8 percent.
C) 5.0 percent.
D) None of the above answers is correct.
26) At the end of last year the Consumer Price Index was equal to 157.5 and at the end of this
year it was equal to 163.8. What is the inflation rate over this time period?
A) 6.3 percent
B) 4.0 percent
C) 3.85 percent
D) 10.1 percent
27) If the price level last year was 220 and this year is 250, what is the inflation rate between the
two years?
A) 30 percent
B) 13.6 percent
C) 12.2 percent
D) 20 percent
28) If this year the price level is 135 and last year it was 125, the inflation rate is
A) 8 percent.
B) 10 percent.
C) 12 percent.
D) none of the above.
29) Suppose the price level this year is 150 and the price level last year was 125. The inflation
rate between last year and this year was
A) 20 percent.
B) 2 percent.
C) 16.6 percent.
D) 1.6 percent.
30) Suppose that last year the Consumer Price Index was 124; this year it is 130.7. What was the
inflation rate between these years?
A) 30.7 percent
B) 6.7 percent
C) 5.4 percent
D) 5.1 percent
31) If the CPI this year is 220 and was 200 in last year, the annual inflation rate between the two
years is
A) 5 percent.
B) 10 percent.
C) 20 percent.
D) 2 percent.
32) If the Consumer Price Index last year was 110 and 115 this year, the inflation rate is
approximately
A) 4.5 percent.
B) 5.0 percent.
C) 10.0 percent.
D) 15.0 percent.
33) If the CPI for this year is 220 and the CPI for last year was 215, the inflation rate is
A) just over 2 percent.
B) 5 percent.
C) just over 5 percent.
D) 10 percent.
34) If this year’s price level is 126 and last year’s price level was 120, the inflation rate is
________.
A) 0.95 percent a year
B) 5 percent a year
C) 6 percent a year
D) 1.05 percent a year
35) If the CPI at the end of last year was 100 and the CPI at the end of this year was 115, the
inflation rate was
A) 1.5 percent.
B) 15 percent.
C) 100 percent.
D) 115 percent.
36) Last year’s price level was 120 and since then there has been a 5 percent inflation. This year’s
price level is
A) 125.
B) 126.
C) 130.
D) none of the above.
Year
Price level
2012
91
2013
100
2014
110
2015
121
37) In the above table, the inflation rate between 2012 and 2013 is approximately
A) 0.9 percent.
B) 1 percent.
C) 10 percent.
D) 100 percent.
38) In the above table, the inflation rate between 2013 and 2014 is approximately
A) 9 percent.
B) 10 percent.
C) 100 percent.
D) 110 percent.
39) In the above table, the inflation rate between 2014 and 2015 is approximately
A) 10 percent.
B) 11 percent.
C) 121 percent.
D) None of the above answers is correct.
Year
Price index
Inflation rate
(percent)
1
100
2
117
A
3
125
B
4
120
C
5
D
8.3
6
150
E
40) In the table above, what inflation rate belongs in space A?
A) 17.0 percent
B) 6.8 percent
C) 8.3 percent
D) -4.0 percent
41) In the table above, what inflation rate belongs in space B?
A) 17.0 percent
B) 6.8 percent
C) 8.3 percent
D) -4.0 percent
42) In the table above, what inflation rate belongs in space C?
A) 17.0 percent
B) 6.8 percent
C) 8.3 percent
D) -4.0 percent
43) In the table above, what price level belongs in space D?
A) 125
B) 130
C) 140
D) 145
44) In the table above, what inflation rate belongs in space E?
A) 17.0 percent
B) 6.8 percent
C) 8.3 percent
D) 15.4 percent
2012 2013
Item
Quantity
Price
Quantity
Price
Books
10
$30
8
$50
Pens
20
$1
15
$2
45) In 2012, consumers in Dexter consumed only books and pens. The prices and quantities for
2012 and 2013 are listed in the table above. The reference base period for Dexter’s CPI is 2012.
What is the cost of the CPI basket in 2012?
A) $430
B) $335
C) $320
D) $540
46) In 2012, consumers in Dexter consumed only books and pens. The prices and quantities for
2012 and 2013 are listed in the table above. The reference base period for Dexter’s CPI is 2012.
What is the CPI in 2012?
A) 320
B) 1.00
C) 3.20
D) 100
47) In 2012, consumers in Dexter consumed only books and pens. The prices and quantities for
2012 and 2013 are listed in the table above. The reference base period for Dexter’s CPI is 2012.
What is the cost of the CPI basket in 2013?
A) $430
B) $335
C) $320
D) $540
48) In 2012, consumers in Dexter consumed only books and pens. The prices and quantities for
2012 and 2013 are listed in the table above. The reference base period for Dexter’s CPI is 2012.
What is the CPI in 2013?
A) 59
B) 129
C) 169
D) 102
49) In 2012, consumers in Dexter consumed only books and pens. The prices and quantities for
2012 and 2013 are listed in the table above. The reference base period for Dexter’s CPI is 2012.
What is the inflation rate in 2013?
A) 69 percent
B) zero
C) 31 percent
D) 2 percent
50) If this year’s price level exceeds last year’s
A) the inflation rate between these years has been positive.
B) the inflation rate is accelerating.
C) deflation is occurring.
D) no relative price changes are occurring.
51) If the price level for the last three months has been 112, 125, and 126, we would say
A) inflation has been constant over the three months.
B) inflation was more rapid between the first and second month than between the second and
third month.
C) inflation was less rapid between the first and second month than between the second and third
month.
D) inflation has steadily increased over the three months.
52) Assume the inflation rate falls from 4 percent to 2 percent. This means that
A) the price level has fallen.
B) the price level is increasing more slowly.
C) the economy is experiencing deflation.
D) real GDP is decreasing.
53) If the inflation rate is negative, the price level in an economy is
A) falling.
B) rising slowly.
C) constant.
D) rising rapidly.
54) Suppose that the price level was 100 in 2011, 110 in 2012, and 130 in 2013. Over these three
years
A) deflation occurred at an accelerating rate.
B) the inflation rate was positive but slowing.
C) prices were stable.
D) the inflation rate was positive and accelerating.
55) In China, suppose that the price level was 100 in 2014, 110 in 2015, and 120 in 2016. Over
these three years
A) the inflation rate accelerated.
B) inflation did not occur.
C) prices were stable.
D) the inflation rate was positive.
56) In the United States, the inflation rate has
A) remained almost constant over the past 25 years.
B) risen and fallen since the 1970s.
C) fallen as a result of OPEC oil price hikes.
D) risen constantly over the past 30 years.
57) Looking at inflation rates in the United States since the 1970s we see that
A) inflation fell the most during the 1970s productivity slowdown.
B) the highest inflation rates were the double digits during the 1990s.
C) the inflation rate increased with the increased growth of the 1990s.
D) the 1970s experienced the highest inflation rates.
58) The biases in the CPI include the
A) old goods, unemployment, and inflation biases.
B) new goods, quality change, and substitution biases.
C) old goods, new goods, and quality change biases.
D) substitution, new goods, and old goods biases.
59) The bias in the CPI typically
A) overstates inflation.
B) understates inflation.
C) about half the time overstates and about half the time understates the inflation rate.
D) cannot be measured or estimated.
60) Which of the following means that the CPI overstates the actual inflation rate?
A) new goods bias
B) quality change bias
C) outlet substitution bias
D) All of the above cause the CPI to overstate inflation.
61) The biases in the CPI are
A) not important since they are so small.
B) important only to economists, not the real world.
C) important since they effect nearly 1/3 of federal government spending.
D) not important although they are large.
62) The currently used method for calculating the CPI
A) accounts for people increasing consumption of a good that falls in relative price.
B) probably overstates inflation by about 1 percentage point.
C) has no effect on government expenditures.
D) None of the above answers are correct.
63) Because of the biases in calculating the CPI, actual inflation is
A) accurately measured.
B) less than the measured inflation rate by about 1 percent per year.
C) more than the measured inflation rate by about 1 percent per year.
D) more than the measured inflation rate by about 1 percent per month.
64) The currently used method for calculating the CPI
A) accounts for people increasing consumption of a good that falls in relative price.
B) probably overstates inflation by about 1 percentage point.
C) has no effect on government expenditures.
D) None of the above answers are correct.
65) An example of the new goods bias in the CPI is the
A) introduction of higher quality brakes as standard equipment on new cars.
B) introduction of hybrid automobiles, vehicles that were not made until recently.
C) decreasing popularity of SUVs as the price of gasoline has risen.
D) switch from traditional car dealerships to low-cost Internet car buying services.