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Macroeconomics
Test 1
31
Economics
02/24/2011

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Term
Which of the following is not true about the Consumer Price Index (CPI)?
a. The U.S. income tax system is indexed based on the CPI.
b. The majority of labor union contracts have wages indexed by the CPI.
c. The CPI can be used to transform nominal variables into real variables.
d. The CPI can be used to measure the inflation rate.
e. Social security benefits are indexed by the CPI.
Definition
B
Term
Suppose that Colleen's nominal wage rate was $20 per hour in 1998, the base year for the CPI. If the CPI in
2003 was 120.0 and her nominal wage had risen to $22 per hour, what was her real wage in 2003?
a. $16.67
b. $18.33
c. $22.00
d. $26.40
e. her real wage for 2003 cannot be determined with the information given
Definition
B
Term
Assume that Ernesto earned a nominal wage rate of $15 per hour in 2001, the base year for the CPI. If the CPI
in 2002 was 102.6 and his nominal wage rate was $16 per hour, what was his real wage rate in 2001?
a. $14.62
b. $15.00
c. $15.59
d. $16.00
e. His real wage for 2001 cannot be determined with the information given.
Definition
B
Term
If the Consumer Price Index (CPI) increases from 100 to 200 and the nominal wage increases from $100 to
$400, what is the change in the real wage in terms of the beginning year's dollars?
a. +$200
b. +$400
c. +$100
d. +$300
e. -$200
Definition
C
Term
Suppose workers agreed to a contract that guaranteed a real wage increase of 3 percent per year. If the
inflation rate was 7 percent over the following year, what is the required increase in the nominal wage to meet
the contract requirements?
a. 10 percent
b. 3 percent
c. 4 percent
d. 7 percent
e. 1 percent
Definition
A
Term
In which of the following situations would a worker be happiest?
a. She receives a pay cut and her nominal wage falls by 5 percent, while the CPI falls by 20
percent.
b. She receives a pay cut and her nominal wage falls by 5 percent, while the CPI increases
by 10 percent.
c. Her nominal wage remains the same, as does the CPI.
d. She receives a raise and her nominal wage increases by 5 percent, while the CPI increases
by 10 percent.
e. She receives a raise and her salary increases by 5 percent, while the CPI falls by 5
percent.
Definition
A
Term
Suppose you had the following information regarding the economy:
Year Nominal Wage CPI
2001 $15.00 100
2002 $16.50 110
2003 $25.00 150
Which of the following best describes the behavior of the real wage rate?
a. It increased from 2001 to 2002 and increased further from 2002 to 2003.
b. It dropped from 2001 to 2002 and then increased from 2002 to 2003.
c. It dropped from 2001 to 2002 and then remained the same from 2002 to 2003.
d. It increased from 2001 to 2002 and then dropped from 2002 to 2003.
e. It remained the same from 2001 to 2002 and then increased from 2002 to 2003.
Definition
E
Term
The wage rate that workers should really care about is
a. both the real wage rate and the nominal wage rate
b. the nominal wage rate
c. the nominal wage rate multiplied by the real wage rate
d. neither the real wage rate nor the nominal wage rate
e. the real wage rate
Definition
E
Term
Which of the following would be included in the GDP Price Index but not in the Consumer Price Index?
a. the price of a Chrysler automobile
b. the price of a fighter aircraft
c. the price of a used computer
d. the price of a tube of toothpaste
e. the price of a bottle of shampoo
Definition
B
Term
If the prices of domestic consumer goods increased while the prices of imported consumer goods decreased,
and the demand for each remained the same, which of the following would most likely occur?
a. The GDP price index would decrease while the CPI would increase.
b. Both the GDP price index and the CPI would decrease.
c. The GDP price index would increase more than the CPI.
d. The CPI would increase more than the GDP price index.
e. Both the GDP price index and the CPI would increase by the same amount.
Definition
C
Term
If the price of used automobiles increased dramatically relative to all other prices, and the demand for all
goods remained the same, which of the following would most likely occur?
a. The GDP price index would decrease less than the CPI.
b. Both the GDP price index and the CPI would decrease.
c. The GDP price index would increase more than the CPI.
d. The CPI would increase more than the GDP price index.
e. Both the GDP price index and the CPI would increase by the same amount.
Definition
D
Term
The index used to translate nominal GDP into real GDP is the
a. Consumer Price Index
b. Wholesale Price Index
c. GDP Price Index
d. Producer Price Index
e. Manufacturer's Input Price Index
Definition
C
Term
Inflation reduces the average real income in the economy and redistributes purchasing power.
a. True
b. False
Definition
B
Term
Suppose the economy consists of two distinct groups: wage earners and goods sellers. If the price level
increases by 30 percent and real wages increase by 30 percent,
a. there will be no redistribution of purchasing power between goods sellers and wage
earners
b. purchasing power will be redistributed from wage earners to goods sellers
c. purchasing power will be redistributed from goods sellers to wage earners
d. nominal wages will increase by 90 percent
e. nominal wages will decrease by 60 percent
Definition
C
Term
Inflation is harmful to society because it often
a. causes consumers' purchasing power to decline
b. causes sellers' costs to increase
c. causes nominal wages to fall
d. causes purchasing power to be redistributed in haphazard ways
e. has no effect at all on anyone's purchasing power
Definition
D
Term
Which of the following statements about unanticipated inflation is true?
a. It reduces average purchasing power in the economy.
b. It reduces total purchasing power in the economy.
c. It redistributes purchasing power in the economy.
d. It reduces nominal wages.
e. Its effects are spread evenly throughout the economy so that no one gains or loses from
inflation.
Definition
C
Term
To approximate the percentage change in real income over any period of time,
a. is not possible
b. we need to subtract the rate of inflation from the percentage change in nominal income
c. we need to divide the percentage change in nominal income by the inflation rate
d. we need to multiply the change in income by the inflation rate
e. we need to multiply the nominal percentage change in income by the percentage change
in inflation rate
Definition
B
Term
Suppose a lender charged a 9 percent nominal interest rate and the expected inflation rate is 4 percent. If the
actual inflation ended up being 2 percent, the real rate the lender received is ______ than the real rate the
lender expected by _______?
a. greater, 2 percent
b. greater, 4 percent
c. lower, 2 percent
d. lower, 4 percent
e. greater, 1 percent
Definition
A
Term
The real interest rate is calculated as the
a. expected rate of inflation divided by the nominal interest rate
b. real GDP plus the expected rate of inflation
c. nominal interest rate minus real GDP
d. nominal interest rate minus the expected rate of inflation
e. real GDP multiplied by the expected rate of inflation
Definition
D
Term
If a lender wants a real return of 6 percent and she expects inflation to be 4 percent, which of the following is
the correct nominal interest rate to charge?
a. 4 percent
b. 6 percent
c. 2 percent
d. 10 percent
e. -2 percent
Definition
D
Term
Suppose that a labor union leader is trying to bargain for an increase in union workers' real wages of 5
percent. If he expected the price level to rise at a rate of 3 percent this year, how much would nominal wages
need to increase for him to accomplish his objective?
a. 2 percent
b. 3 percent
c. 5 percent
d. 8 percent
e. 15 percent
Definition
D
Term
If you lend money at a nominal interest rate of 9 percent and the inflation rate is 1 percent, what real interest
rate will you earn?
a. 3 percent
b. 4 percent
c. 8 percent
d. 12 percent
e. 15 percent
Definition
C
Term
If you borrow money at a nominal interest rate of 5 percent and the inflation rate is 10 percent, what real
interest rate will you pay?
a. -5 percent
b. 0.5 percent
c. 2 percent
d. 5 percent
e. 10 percent
Definition
A
Term
When borrowing money to purchase an automobile, Raul has the choice between a fixed nominal interest rate or adjustable nominal interest rate loan. Typically the adjustable rate loans start with a lower rate than the
fixed rate loans. Given that, under what circumstances would Raul most likely want to borrow money at the
higher fixed rate?
a. when he expects the inflation rate to rise
b. when he expects the inflation rate to decrease
c. when he expects the inflation rate to remain unchanged
d. when he expects the price level to remain stable
e. when he expects the government to act to lower the inflation rate
Definition
A
Term
In general, a higher-than-anticipated inflation rate
a. helps everyone
b. hurts everyone
c. helps creditors and harms debtors
d. helps debtors and harms creditors
e. helps sellers
Definition
D
Term
Everything else constant, who is least likely to lose from unexpected inflation?
a. a retired person whose pension payments are fixed in dollars
b. a person with a large amount of money deposited in a savings account
c. a bank scheduled to receive fixed nominal mortgage payments
d. a homeowner scheduled to make fixed nominal mortgage payments
e. a consumer who spends extra time shopping for the lowest prices
Definition
D
Term
Most economists believe that the CPI
a. accurately measures the inflation rate
b. accurately measures the inflation rate except during years when there are major economic
shocks like the Arab oil embargo
c. slightly underestimates the inflation rate
d. seriously underestimates the inflation rate
e. overestimates the inflation rate
Definition
E
Term
How are the prices of various goods and services determined for the Consumer Price Index (CPI)?
a. by an extensive yearly household survey
b. by an extensive monthly survey of stores, apartments, and owner-occupied homes
c. by an extensive yearly survey of stores, apartments, and owner-occupied homes
d. by an extensive monthly household survey
e. through the same survey used to determine the typical market basket
Definition
B
Term
Most economists believe that substitution behavior by consumers causes inflation measured by the Consumer
Price Index (CPI) to overstate the true rate of inflation.
a. True
b. False
Definition
A
Term
Improvements in the quality of consumer goods and services over time
a. cause inflation as measured by the CPI to overstate the actual inflation rate
b. cause inflation as measured by the CPI to understate the actual inflation rate
c. are accounted for in the CPI
d. are insignificant and thus would not affect the CPI even if accounted for
e. improve the accuracy and consistency of the market basket
Definition
A
Term
When a payment is indexed to inflation and the price index understates inflation,
a. the real payment decreases over time
b. the real payment increases over time
c. the nominal payment decreases over time
d. in unemployment rate will increase
e. the level of unemployment will increase
Definition
A