# Economics Chapter 7 Inflation And Deflation Analytic Skills question Status Previous

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Chapter 7 The Macroeconomy: Unemployment, Inflation, and Deflation 61
2005
Market Basket 2005 2010
Commodity Quantity Price Price
A 50 3 4
B 75 2 3
50) Refer to the above table. You are given information on Jane s consumption for 2005 and 2010.
Using 2005 as the base year, compute the price index for 2010. The index equals
A) 1.5. B) 70.588. C) 141.667. D) 107.143.
2005
Market Basket 2005 2010
Commodity Quantity Price Price
A 40 5 7
B 30 6 8
51) Refer to the above table. You are given information on Jane s consumption for 2005 and 2010.
Using 2005 as the base year compute the price index for 2010. The index equals
A) 0.75. B) 73.007. C) 87.50. D) 136.842.
2005
Market Basket 2005 2010
Commodity Quantity Price Price
A 20 4 5
B 40 3 6
52) Refer to the above table. You are given information on Jane s consumption for 2005 and 2010.
Using 2005 as the base year compute the price index for 2010. The index equals
A) 170. B) 58.823. C) 0.5823. D) 0.17.
62 Miller Economics Today, 16th Edition
2005
Market Basket 2005 2010
Commodity Quantity Price Price
A 30 7 9
B 80 6 18
53) Refer to the above table. You are given information on Jane s consumption for 2005 and 2010.
Using 2005 as the base year compute the price index for 2010. The index equals
A) 40.35. B) 247.826. C) 0.4035. D) 0.2478.
54) If all prices in the economy go up from one year to the next, the CPI index, using the previous
year as the base would
A)
b
e less than 100.
B)
b
e greater than 100.
C) not be influenced since quantities have remained unchanged.
D) not be determined since enough information is given.
55) When computing a price index, the base year is
A) the earliest year for which data are available.
B) the year that is chosen as the point of reference for comparison of prices with other years.
C) the most recent year for which data are available.
D) the most recent year in which the inflation rate was close to zero.
56) The GDP deflator is
A) an index that utilizes a consumer s market basket of goods in calculating the inflation rate.
B) the most general indicator of inflation since it measures changes in the prices of all goods
and services in the economy.
C) an index used to calculate inflation at the wholesale level.
D) the least used index because it is so costly to calculate.
57) The Consumer Price Index (CPI) is a
A) statistical measure of a weighted average of prices of a specific set of goods and services
purchased by consumers in urban areas.
B) statistical measure of a weighted average of prices of commodities that firms produce and
sell.
C) price index measuring the changes in prices of all new goods and services produced in the
economy.
D) statistical measure of average prices using annually updated weights based on surveys of
consumer spending.
58) The Producer Price Index (PPI) is a
A) statistical measure of a weighted average of prices of a specific set of goods and services
purchased by wage earners in urban areas.
B) statistical measure of a weighted average of prices of commodities that firms produce and
sell.
C) price index measuring the changes in prices of all new goods and services produced in the
economy.
D) price index that tracks the price levee of commodities that firms purchase from other firms.
59) The Personal Consumption Expenditure Index (PCE) is a
A) statistical measure of a weighted average of prices of a specific set of goods and services
purchased by wage earners in urban areas.
B) statistical measure of a weighted average of prices of commodities that firms produce and
sell.
C) price index measuring the changes in prices of all new goods and services produced in the
economy.
D) statistical measure of average prices using annually updated weights based on surveys of
consumer spending.
60) The GDP deflator is a
A) statistical measure of a weighted average of prices of a specific set of goods and services
purchased by wage earners in urban areas.
B) statistical measure of a weighted average of prices of commodities that firms produce and
sell.
C) price index measuring the changes in prices of all new goods and services produced in the
economy.
D) price index that tracks the price level of commodities that firms purchase from other firms.
61) Suppose medical care makes up 5 percent of the CPI index, and that prices rise in the medical
care area faster than in the rest of the economy. An elderly couple spends 15 percent of their
income on medical care. For this couple, the CPI
A) understates the inflation rate because of the importance of medical care for this family.
B) overstates the inflation rate because this family is not typical of the country as a whole.
C) understates the inflation rate because the CPI always understates inflation.
D) is a good measure of inflation since the bias inherent in the CPI is offset by the increased
emphasis on health care for this family.
62) For the CPI. the value of the index in the base year
A) always equals 100.
B) depends upon price and quantity that are constantly changing.
C) is always greater than 100.
D) depends upon what prices did the year before.
63) The index that is not based on a fixed market basket of goods and services is the
A) CPI. B) PPI.
C) Wholesale Price Index. D) GDP Price Deflator.
64) The indices that are based on a fixed market basket of goods and services are
A) CPI and GDP deflator. B) PPI and GDP deflator.
C) CPI and PPI. D) CPI, PPI and GDP deflator.
65) The CPI tends to overstate the true inflation rate because
A) we cannot know what the true inflation rate is.
B) it fails to consider the effects of new products in the marketplace.
C) the market basket actually selected is inappropriate.
D) the market basket fails to weigh housing costs sufficiently.
66) Which of the following is NOT a criticism of the CPI?
A) The CPI does not account for the way consumer substitute less expensive items for higher
priced items.
B) The CPI ignores changes in consumption patterns that occur between years in which it
revises the index.
C) The CPI ignores successful new products until long after they have been introduced.
D) The CPI ignores the changes of prices of goods that firms produce and sell to each other.
67) Throughout U.S. history, inflation has been highest
A) right after a recession. B) right before a recession.
C) during periods of war. D) during Republican administrations.
66 Miller Economics Today, 16th Edition
Year 1 Prices Year 2 Prices
5 textbooks \$75/book \$80/book
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68) Using the above table, the following is the output of a two product economy. The price index in
this economy in Year 2, assuming Year 1 is the base year, is
A) 113.0. B) 88.5. C) 107.1. D) 106.7.
69) Inflation can be defined as
A) an increase in the purchasing power of money.
B) a decrease in the purchasing power of money.
C) no change in the purchasing power of money.
D) an increase in real income.
70) Which of the following is NOT a measure of the general level of prices?
A) Consumer Price Index B) Producer Price Index
C) GDP Deflator D) Personal Sales Deflator Index
71) An increase in inflation will cause a reduction in which of the following?
A) the nominal value of money B) the Producer Price Index
C) the GDP deflator D) the real value of money
72) Which one of the following is true?
A) Inflation increases the real value of money.
B) In the base year, the value of a price index is 100.
C) The consumer price index measures changes in the average income of consumers.
D) The market basket defined for the consumer price index contains more items than does the
market basket defined for the GDP deflator.
73) Economists agree that the structure of the Consumer Price Index has some problems that limit
its usefulness as a reliable measure of inflation. What is one of these drawbacks?
A) It is based on the faulty assumption that each consumer buys only one unit of each item.
B) It is based on the faulty assumption that consumption choices are not influenced by
income levels.
C) It ignores changes in consumption patterns brought about by changes in the relative prices
of consumer goods.
D) It is based on a market basket of mail order items and does not include the goods that
consumers typically purchase.
74) Which government agency compiles the consumer price index?
A) the Congressional Budget Office
B) the Government Accounting Office
C) the Bureau of Labor Statistics
D) It is not compiled by a government agency, but rather by an independent research
institution called the Conference Board.
75) Which is the broadest price index reported in the United States?
A) the CPI U B) the GDP deflator
C) the consumer price index D) the producer price index
76) The GDP deflator is not a fixed quantity price index, but the CPI is. What is the significance of
this fact?
A) The GDP deflator does not include enough items in its market basket.
B) A base year cannot be defined for the GDP deflator.
C) The GDP deflator reflects not only changes in prices, but also changes in consumption
patterns as consumers substitute between goods.
D) The GDP deflator overstates the true rate of inflation, whereas the CPI understates it.
77) How has the pattern of movements in the U.S. price level changed since World War II?
A) Periods of inflation have largely been eliminated.
B) Periods of deflation have largely been eliminated.
C) The annual rate of inflation has never risen above 3 percent.
D) The price level has become more volatile.
78) The price index for any designated base year must always equal
A) the CPI for that year.
B) 0.
C) 100.
D) one divided by the nominal price change for the year.
79) The government agency which has been given the task of calculating the Consumer Price Index
(CPI) is
A) the Bureau of Economic Research. B) the Department of State.
C) the Council of Economic Advisors. D) the Bureau of Labor Statistics.
80) The purchasing power of the dollar
A) increases as the price of basic goods and services increases.
B) is the amount of goods and services that can be purchased with the dollar.
C) has been rising in the United States since 1945.
D) has remained unchanged in the last 20 years.
Market 2005 Price Cost of Market 2010 Price Cost of Market
Commodity Basket Quantity per Unit Basket in 2005 per Unit Basket in 2010
Milk 10 gallon 2.00 20.00 2.50 25.00
Eggs 10 dozen 2.00 20.00 3.00 30.00
Bread 10 loaves 2.00 20.00 3.00 30.00
81) In the table shown above, the total cost of the market basket of commodities in 2005 was
A) \$6.00. B) \$8.50. C) \$60.00. D) \$85.00.
82) In the table shown above, the total cost of the market basket in 2010 was
A) \$6.00. B) \$8.50. C) \$60.00. D) \$85.00.
83) If 2005 is the base year in the table shown above, what is the price index for the year 2005?
A) 100.0 B) 121.3 C) 147.1 D) 141.7
84) If 2005 is the base year in the table shown above, what is the price index for the year 2010?
A) 100.0 B) 114.7 C) 147.1 D) 141.7
85) Considering the data in the table shown above, what is the inflation rate between years 2005 and
2010?
A) 0.0 percent B) 41.7 percent C) 17.1 percent D) 3.4 percent
A Two Good Market
Market Basket 2005 Price 2010 Price
Item Quantity per Unit per Unit
Light Bulbs 500 \$1.00 \$2.00
Volleyballs 1,000 \$5.00 \$7.00
86) In the table shown above, assuming that the market basket cost of light bulbs and volleyballs in
the base year was \$4500, what would the price index for this two good market equal in the year
2005?
A) 104.86 B) 100.00 C) 112.52 D) 122.22
87) Considering the data from the table shown above, assuming that the market basket cost of light
bulbs and volleyballs in the base year was \$4500, what would be the price index for the year
2010?
A) 177.78 B) 156.30 C) 100.00 D) 92.70
88) In the United States, most often the ________ changes first, and the ________ follows.
A) CPI; PPI B) GDP deflator; CPI
C) PPI; CPI D) PCE; CPI
89) The term market basket means a
A) collection of goods that can fit into an average shopping cart.
B) collection of goods that changes every year and is defined by Congress.
C) collection of goods that is used by a typical family.
D) collection of goods that is purchased during a holiday season.
90) The market basket cost \$300 in 2010, while it cost \$250 in the base year. Therefore, the price
index for 2010 is
A) 83.
B) 120.
C) 80.
D) cannot be calculated because the inflation rate is not given.
91) You receive a five percent raise in your hourly wage. The inflation rate is four percent. Your
purchasing power has
A) increased. B) decreased.
C) stayed the same. D) is indeterminate.
92) You receive a five percent raise in your salary. The inflation rate is six percent. The purchasing
power of your salary has
A) increased by one percent. B) decreased by one percent.
C) increased by 11 percent. D) decreased by 11 percent.
93) In 2010, the price for a market basket of consumer goods is \$1,600. In the base year, the cost of
the identical market basket was \$1,000. The price index in this case is
A) 16.0. B) 130.0. C) 200.0. D) 160.0.
94) In 2010, the price for a market basket of consumer goods is \$800. In the base year, the cost of the
identical market basket was \$1,000. The price index in this case is
A) 80.0. B) 130.0. C) 800.0. D) 180.0.
95) According to your text, during the 2000s, the inflation rate was in which range of percentages?
A) 0 5% B) 5 10% C) 10 15% D) 15 20%
96) How are inflation and the purchasing power of money related?
97) In what ways is the consumer price index flawed?
98) What is a price index? How do the CPI, the PPI, the PCE Index and the GDP deflator differ?
Chapter 7 The Macroeconomy: Unemployment, Inflation, and Deflation 73
7.5 Anticipated versus Unanticipated Inflation
1) Typically, nominal interest rates and anticipated inflation rates
A) move in opposite directions.
B) are not related.
C) move in the same direction.
D) are such that the nominal rate is one half the anticipated rate.
2) Unanticipated positive inflation will create
A) losses for creditors and gains for debtors.
B) losses for both creditors and debtors.
C) gains for both creditors and debtors.
D) gains for creditors and losses for debtors.
3) Most of the problems caused by inflation are caused by the fact that
A) there are no ways available for people to protect themselves against inflation.
B) anticipated inflation induces people to protect themselves against inflation.
C) inflation causes the purchasing power of the dollar to increase.
D) the inflation is often unanticipated and therefore comes as a surprise to individuals in the
economy.
4) Fully anticipated inflation occurs when
A) the actual inflation rate equals the anticipated inflation rate.
B) the actual inflation rate is less than the anticipated inflation rate.
C) the inflation rate is zero.
D) the anticipated inflation rate and the unanticipated inflation rate are equal.
5) The real rate of interest is the
A) nominal rate of interest minus the anticipated rate of inflation.
B) current rate actually paid by the borrower.
C) difference between the bank s lending and savings rates.
D) current rate which the government pays on its debt.
6) If the rate of inflation is 4 percent and the real interest rate is 3 percent, the nominal interest rate
should be
A) 1 percent. B) 4 percent. C) 7 percent. D) 11 percent.
7) Under which one of the following situations would you be better off?
A) You have \$10,000 in your savings account paying 5 percent per year and unanticipated
inflation is 8 percent per year.
B) You have paid \$500 for a \$1,000 U.S. savings bond that matures in 10 years and
unanticipated inflation is 10 percent per year.
C) You lend a friend \$1,000 at 6 percent to be repaid in one year and unanticipated inflation is
7 percent during the year.
D) You borrowed \$2,500 at 7 percent to pay for this year s college expenses and unanticipated
inflation is 12 percent during the year.
8) Suppose that you borrow \$5,000 from the bank to purchase some land and you agree to pay 9
percent interest on the loan. If the loan must be repaid in 12 months and the inflation rate is 13
percent during the year, then
A) you will repay the bank with dollars with more purchasing power than you initially
borrowed.
B) you will repay the bank with fewer dollars than the bank initially loaned you.
C) you will repay the bank with dollars with less purchasing power than it initially loaned
you.
D) the bank will receive fewer dollars, because of inflation, than it had initially expected to
receive.
9) The real rate of interest is defined as
A) zero.
B) the nominal rate of interest.
C) the nominal rate of interest minus the anticipated inflation rate.
D) the nominal rate of interest plus the anticipated inflation rate.
10) The annual rate of inflation averaged 2 percent during the past decade, but borrowers and
lenders anticipate that the price level will rise at a rate of 3 percent next year. The current
nominal interest rate is 7 percent. The real rate of interest is
A) 10 percent. B) 9 percent. C) 5 percent. D) 4 percent.
11) Assume you borrow funds to buy a new car at 10 percent interest and you think that the
economy wide rate of inflation over the life of the loan will be 8 percent. If you are correct in
your assumption, your real rate of interest on the car loan will be
A) 2 percent. B) 8 percent. C) 10 percent. D) 18 percent.
12) Who stands to gain as a result of unanticipated inflation?
A) Creditors B) Debtors
C) Persons living on a fixed income D) Retired individuals
13) During a period of unanticipated inflation, the group that is most likely to benefit is
A) debtors. B) savers.
C) creditors. D) retired individuals.
14) When the unanticipated inflation rate is zero,
A) creditors gain at the expense of debtors.
B) debtors gain at the expense of creditors.
C) neither creditors not debtors gain or lose.
D)
b
oth creditors and debtors lose at the expense of the government.
15) The cost of inflation to society includes
I. The opportunity costs of resources used by people to protect themselves against inflation
II. The costs associated with recalculating prices
A) I only B) II only C) Both I and II D) Neither I nor II
16) Inflation can cause a misallocation of resources because
A) inflation doesn t proceed evenly which means that people have a difficult time
determining when a price change signals a change in relative prices.
B) firms have to change their price labels at unusual times.
C) the nominal rate of inflation doesn t equal the real rate of inflation.
D) people are encouraged to borrow too much.
17) An unexpected reduction in inflation would tend to benefit which of the following?
A) creditors B) debtors
C) creditors and debtors D) neither creditors nor debtors
18) For most people, the problems of inflation are caused by the fact that
A) the inflation is unanticipated.
B) the inflation is anticipated.
C) the inflation rate causes the purchasing power of money to increase.
D) all prices change so there is no way to protect themselves against the decline in their
wealth.
19) Unanticipated inflation occurs when
A) everyone knows perfectly the true rate of inflation.
B) the actual inflation rate differs from the anticipated inflation rate.
C) the inflation rate is zero.
D) there is no change in the purchasing power of money.
20) Suppose the actual inflation rate is less than the anticipated inflation rate. Given this
information, we know with certainty that the real rate of interest
A) is negative.
B) is more than the nominal rate of interest.
C) equals the nominal rate of interest.
D) none of the above (i.e., more information is needed to answer this question).
21) The nominal rate of interest is
A) CPI minus an inflationary premium.
B) PPI minus an inflationary premium.
C) the market rate of interest expressed in today s dollars.
D) the real rate of interest minus the anticipated rate of inflation.
22) The real rate of interest is
A) the nominal rate of interest divided by the anticipated rate of inflation.
B) negative if the anticipated rate of inflation is zero.
C) the market rate of interest expressed in today s dollars.
D) the nominal rate of interest minus the anticipated rate of inflation.
23) With respect to the interest rate, the inflationary premium
A) is added to the nominal rate of interest to obtain the real rate of interest.
B) is the interest rate expressed in today s dollars.
C) covers anticipated depreciation in purchasing power.
D) is derived from the COLA.
24) The price level has been rising 5 percent a year for twenty years and is expected to continue to
do so. The nominal rate of interest is 8 percent. The real rate of interest is
A) 0 percent. B) 8/5 1.6 percent.
C) 3 percent. D) 5 percent.
25) The inflation rate has been 4 percent for twenty years, and the nominal interest rate has been 8
percent during this same time period. Suddenly, the public anticipates that the inflation rate will
be 8 percent this coming year. The real rate of interest for the coming year is
A) 0 percent. B) 2 percent. C) 4 percent. D) 6 percent.

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