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Excercise #1: Calculate the Consumer Price IndexIf CPI for 2006 is above 1.05 then purchasing power has NOT increased of householdincome.Inflation rate for 2001 = (CPI 2001 - CPI 2000) / (CPI of 2000)2. In the U.S. during the 1970s, nominal interest rates were:Falling and real interest rates were falling.Rising and real interest rates were rising.Falling and real interest rates were rising.NO Rising and real interest rates were falling.YES Rising and real interest rates became negative.FeedbackFor more information, see p. 168 of your textbook.4. The CPI measures the ________; a measure of the rate of inflation is the_______.NO base year price level; current year price levelcurrent year price level; base year price levelchange in the level of prices; level of pricesYES level of prices; change in the level of pricesnominal price level; real price levelFeedbackFor more information, see p. 150 of your textbook.8. The price of a gallon of gasoline at the pump increased by 10 percent at thesame time that the inflation rate was 15 percent. The nominal price of gasoline_____ and the real price of gasoline _____.increased; increasedYES increased; decreasedNO increased; did not changedecreased; decreaseddecreased; increasedFeedbackFor more information, see p. 152 of your textbook.9. The real interest rate can be written in mathematical terms as:NO r = i - nYES r = n - ir = i + nr = n + ir = i / nFeedbackFor more information, see p. 167 of your textbook.2. The annual increase in the dollar value of a financial asset is called the:real rate of return.NO real interest rate.YES nominal interest rate.inflation rate.deflation rate.
 
FeedbackFor more information, see p. 167 of your textbook.8. If both the lender and borrower agree on an 7% interest rate, both expect a3% inflation rate, and inflation turns out to be 3%, then _____ by the inflation.NO the borrower is hurt and the lender gainsthe borrower gains and the lender is hurtYES neither the borrower nor the lender are hurtboth the borrower and lender are hurteither the borrower or the lender may be hurtFeedbackFor more information, see p. 169 of your textbook.1. If the Consumer Price Index (CPI) overstates the true rate of inflation, theuse of the CPI to adjust nominal incomes results in:YES understating gains in real incomes.NO overstating gains in real incomes.an accurate statement of gains in real incomes.nominal values equaling real values.an arbitrary redistribution of incomeFeedbackFor more information, see p. 156 of your textbook.2. To insure that your salary maintains its real purchasing power from year toyear, your nominal salary must be:NO deflated.YES indexed.aggregated.hyperinflated.adjusted for relative price changes.FeedbackFor more information, see p. 154 of your textbook.8. A labor contract provides for a first-year wage of $10 per hour, andspecifies that the real wage will rise by 3 percent in the second year of thecontract. The CPI is 1.00 in the first year and 1.07 in the second year. Whatdollar wage must be paid in the second year?$10.00NO $10.30$10.70$11.00YES $11.02FeedbackFor more information, see p. 155 of your textbook.10. To prevent people paying a higher percentage of their income in taxeseven when their real incomes have not changed Congress:implemented a flat tax.reduced the capital gains tax.YES indexed the income tax brackets to the CPI .NO deflated the income tax brackets to the CPI.increased the capital depreciation allowance.Feedback
 
For more information, see p. 161 of your textbook.4. Inflation in the health-care sector apparently is overstated because the CPIdoes not adequately adjust for _____ changes.priceYES qualityNO volumequantitymeasurementFeedbackFor more information, see p. 158 of your textbook.6. The CPI in 1930 equaled 0.17. The CPI in 1931 equaled 0.15. The rate ofinflation between 1930 and 1931 was ____ percent.-13.3YES -11.81.511.8NO 13.3FeedbackFor more information, see p. 151 of your textbook.7. Suppose that the price of chicken rises sharply compared to the price ofturkey. People buy more turkey and less chicken than they did in the CPI baseyear. In this situation the CPI will tend to _____ inflation as a result of _____bias.YES overstate; substitutionunderstate; substitutionNO accurately measure; substitutionoverstate; quality adjustmentunderstate; quality adjustmentFeedbackFor more information, see p. 157 of your textbook.**8. The process of converting current dollar values into real terms iscalled ______, while the process of adjusting nominal quantities to maintain theirpurchasing power is called ______.deflation; inflationinflation; hyperinflationdeflation; inflationYES deflating; indexingNO indexing; deflatingFeedbackFor more information, see p. 155 of your textbook.. Deflation is a situation in which the:quantity of goods and services produced is increasing over time.NO quantity of goods and services produced is decreasing over time.YES prices of most goods and services are falling over time.prices of most goods and services are rising over time.prices of most goods and services are not changing over time.Feedback
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