# Shared Flashcard Set

## Details

Macroeconomics
Test 1
31
Economics
02/24/2011

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 in2003 was 120.0 and her nominal wage had risen to \$22 per hour, what was her real wage in 2003?a. \$16.67b. \$18.33c. \$22.00d. \$26.40e. 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 CPIin 2002 was 102.6 and his nominal wage rate was \$16 per hour, what was his real wage rate in 2001?a. \$14.62b. \$15.00c. \$15.59d. \$16.00e. 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. +\$200b. +\$400c. +\$100d. +\$300e. -\$200
Definition
 C
Term
 Suppose workers agreed to a contract that guaranteed a real wage increase of 3 percent per year. If theinflation rate was 7 percent over the following year, what is the required increase in the nominal wage to meetthe contract requirements?a. 10 percentb. 3 percentc. 4 percentd. 7 percente. 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 20percent.b. She receives a pay cut and her nominal wage falls by 5 percent, while the CPI increasesby 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 increasesby 10 percent.e. She receives a raise and her salary increases by 5 percent, while the CPI falls by 5percent.
Definition
 A
Term
 Suppose you had the following information regarding the economy:Year Nominal Wage CPI2001 \$15.00 1002002 \$16.50 1102003 \$25.00 150Which 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 isa. both the real wage rate and the nominal wage rateb. the nominal wage ratec. the nominal wage rate multiplied by the real wage rated. neither the real wage rate nor the nominal wage ratee. 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 automobileb. the price of a fighter aircraftc. the price of a used computerd. the price of a tube of toothpastee. 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 allgoods 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 thea. Consumer Price Indexb. Wholesale Price Indexc. GDP Price Indexd. Producer Price Indexe. Manufacturer's Input Price Index
Definition
 C
Term
 Inflation reduces the average real income in the economy and redistributes purchasing power.a. Trueb. False
Definition
 B
Term
 Suppose the economy consists of two distinct groups: wage earners and goods sellers. If the price levelincreases by 30 percent and real wages increase by 30 percent,a. there will be no redistribution of purchasing power between goods sellers and wageearnersb. purchasing power will be redistributed from wage earners to goods sellersc. purchasing power will be redistributed from goods sellers to wage earnersd. nominal wages will increase by 90 percente. nominal wages will decrease by 60 percent
Definition
 C
Term
 Inflation is harmful to society because it oftena. causes consumers' purchasing power to declineb. causes sellers' costs to increasec. causes nominal wages to falld. causes purchasing power to be redistributed in haphazard wayse. 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 frominflation.
Definition
 C
Term
 To approximate the percentage change in real income over any period of time,a. is not possibleb. we need to subtract the rate of inflation from the percentage change in nominal incomec. we need to divide the percentage change in nominal income by the inflation rated. we need to multiply the change in income by the inflation ratee. we need to multiply the nominal percentage change in income by the percentage changein inflation rate
Definition
 B
Term
 Suppose a lender charged a 9 percent nominal interest rate and the expected inflation rate is 4 percent. If theactual inflation ended up being 2 percent, the real rate the lender received is ______ than the real rate thelender expected by _______?a. greater, 2 percentb. greater, 4 percentc. lower, 2 percentd. lower, 4 percente. greater, 1 percent
Definition
 A
Term
 The real interest rate is calculated as thea. expected rate of inflation divided by the nominal interest rateb. real GDP plus the expected rate of inflationc. nominal interest rate minus real GDPd. nominal interest rate minus the expected rate of inflatione. 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 isthe correct nominal interest rate to charge?a. 4 percentb. 6 percentc. 2 percentd. 10 percente. -2 percent
Definition
 D
Term
 Suppose that a labor union leader is trying to bargain for an increase in union workers' real wages of 5percent. If he expected the price level to rise at a rate of 3 percent this year, how much would nominal wagesneed to increase for him to accomplish his objective?a. 2 percentb. 3 percentc. 5 percentd. 8 percente. 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 interestrate will you earn?a. 3 percentb. 4 percentc. 8 percentd. 12 percente. 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 realinterest rate will you pay?a. -5 percentb. 0.5 percentc. 2 percentd. 5 percente. 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 thefixed rate loans. Given that, under what circumstances would Raul most likely want to borrow money at thehigher fixed rate?a. when he expects the inflation rate to riseb. when he expects the inflation rate to decreasec. when he expects the inflation rate to remain unchangedd. when he expects the price level to remain stablee. when he expects the government to act to lower the inflation rate
Definition
 A
Term
 In general, a higher-than-anticipated inflation ratea. helps everyoneb. hurts everyonec. helps creditors and harms debtorsd. helps debtors and harms creditorse. 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 dollarsb. a person with a large amount of money deposited in a savings accountc. a bank scheduled to receive fixed nominal mortgage paymentsd. a homeowner scheduled to make fixed nominal mortgage paymentse. a consumer who spends extra time shopping for the lowest prices
Definition
 D
Term
 Most economists believe that the CPIa. accurately measures the inflation rateb. accurately measures the inflation rate except during years when there are major economicshocks like the Arab oil embargoc. slightly underestimates the inflation rated. seriously underestimates the inflation ratee. 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 surveyb. by an extensive monthly survey of stores, apartments, and owner-occupied homesc. by an extensive yearly survey of stores, apartments, and owner-occupied homesd. by an extensive monthly household surveye. 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 ConsumerPrice Index (CPI) to overstate the true rate of inflation.a. Trueb. False
Definition
 A
Term
 Improvements in the quality of consumer goods and services over timea. cause inflation as measured by the CPI to overstate the actual inflation rateb. cause inflation as measured by the CPI to understate the actual inflation ratec. are accounted for in the CPId. are insignificant and thus would not affect the CPI even if accounted fore. 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 timeb. the real payment increases over timec. the nominal payment decreases over timed. in unemployment rate will increasee. the level of unemployment will increase
Definition
 A
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