You are on page 1of 4

PRACTICE TEST 15

(Bassam AbuAlFoul)

Chapter 15 Inflation and the Price Level Part I: Multiple Choice: Choose the best answer for the following questions.
1. If the consumer price index (CPI) at the end of 1990 was 125 and the CPI at the end of 2000 was 133, then the rate of inflation over the time period was: a. zero, prices were stable during the period. b. 4.8 percent. c. 6.4 percent. d. 8 percent. 2. Which of the following is correct? a. The CPI is not based on a fixed basket of goods and services. b. The GDP deflator reflects the prices of all domestically produced goods and services. c. The GDP deflator is based on a fixed basket of goods and services. d. The GDP deflator is subject to substitution bias. 3. Your grandparents tell you that in 1960 they paid $0.35 for admission to a movie. The price index in 1960 was 30. The price index in today is 171. What is the price your grandparents paid in today's dollars? a. $1.05 b. $1.99 c. $3.01 d. $5.98 4. A change in the price of imports bought by consumers will be: a. reflected in the GDP deflator. b. reflected in GDP. c. reflected in the CPI. d. reflected in net national income. 5. Which of the following statements is correct? a. The real rate of interest can not be a negative number. b. The GDP deflator is NOT based on a fixed basket of goods and services. c. The GDP deflator and the CPI typically diverge. d. Changes in quality are fully reflected in the CPI. 6. Inflation refers to: a. a temporary increase in the price level due to higher tax rates. b. a large increase in food and gasoline prices. c. a situation in which the economy's overall price level is rising. d. an increase in the purchasing power of the dollar. 7. In order to estimate the consumer price index (CPI), the Bureau of Labor Statistics: a. allows the basket of goods and services used to change from month to month. b. chooses a base year. c. determines the prices producers pay for their factors of production. d. determines the goods and services bought by all consumers.

Page 1 of 4

8. Suppose the CPI in 1990 is 125. The CPI in 1999 is 155. What is the rate of inflation over the period? a. 24 percent b. 25 percent c. 30 percent d. 55 percent 9. The price index that measures the cost of a basket of goods and services bought by firms is the: a. CPI (consumer price index). b. GDP deflator. c. Implicit price deflator. d. PPI (producer price index). 10. In 2000 the nominal rate of interest was 7%. The rate of inflation was 2.7%. The real rate of interest was: a. 9.7 percent. b. 7 percent. c. 4.3 percent. d. 2.7 percent. 11. The CPI is calculated based on a. a group of goods and services purchased by a typical household. b. every good and service appearing in the GDP. c. a random sample of visitors to state employment agencies. d. a sample of various wholesale prices. 12. Consider this group of goods: 100 units of Good A, 350 units of Good B, and 30 units of Good C. In Year 1 the prices of these goods are $2.50, $0.71, and $36.50, respectively; in Year 2 the prices are: $3, $1.20, and $30, respectively. What is the CPI in Year 2? (Given year 1 as a base year) a. 93.03 b. 101.66 c. 108.05 d. None of the above. 13. Continuing the previous question, what is the rate of inflation in Year 2? a. 7.49 percent b. 9.303 percent c. 8.05 percent d. 1.66 percent 14. In Year 1 the CPI is 117.1, and in Year 2 it is 126.6. From Year 1 to Year 2, Ahmeds salary rises from $32,000 to $34,000 and Sarahs salary rises from $42,000 to $46,500. Who is more than keeping up with inflation? a. Ahmed b. Sarah c. both Ahmed and Sarah d. neither Ahmed nor Sarah 15. If nominal income is $50,000 and CPI is 132, then real income is equal to: a. $37,878 b. $42,322 c. $39,787 d. $50,000 e. none of the above

Page 2 of 4

16. __________ is an increase in the price level. a. b. c. d. e. Deflation Stagflation Inflation Recession none of the above

17. If the CPI in Year 1 is 132 and the CPI in Year l0 is 178, then a $40,000 salary in Year 1 is equivalent to a ________ salary in Year 10. a. $45,000 b. $53,939 c. $34,569 d. $100,000 e. none of the above 18. If nominal interest rates increase from 8 percent to 10 percent while inflation increases from 5 percent to 8 percent: a. the real interest rate falls from 3% to 2%. b. the real interest rate rises from 4% to 2%. c. the real interest rate falls from 3% to -2%. d. the real interest rate rises from 8% to 12%. 19. Suppose the quality and the price of Ford Mustangs increases over the period 1997-2000. If the CPI does not adjust for the change in quality, the CPI will: a. accurately reflect changes in the cost of living. b. overstate changes in the cost of living. c. understate changes in the cost of living. d. understate changes in the cost of living, but this will be balanced out because the GDP deflator will overstate changes in the cost of living. 20. The consumer price index: a. measures price changes of raw materials. b. adjusts all prices of goods and services for five year periods. c. measures the cost of goods and services bought by a typical consumer. d. cannot measure price changes of intangible production such as services.

Part II: Internet:


You are also encouraged to visit the web site for your textbook which is rich in learning resources and materials related to each chapter. In addition, you can test your knowledge with the online quizzes. The internet address was provided in the course syllabus. Here it is again: http://highered.mcgrawhill.com/sites/007712961x/student_view0/index.html

ANSWERS (For Part I):


1. c. 6.4 percent. 2. b. The GDP deflator reflects the prices of all domestically produced goods and services. 3. b. $1.99 4. c. reflected in the CPI. 5. b. The GDP deflator is NOT based on a fixed basket of goods and services. 6. c. a situation in which the economy's overall price level is rising. 7. b. chooses a base year. 8. a. 24 percent

Page 3 of 4

9. d. PPI (producer price index). 10. c. 4.3 percent. 11. a The consumer price index tracks the total dollar expenditure on a market basket of goods purchased by a typical household. 12. b. 101.66 13. d 1.66 percent (Inflation is measured by the percentage change in the price index number of adjacent years.) 14. b Sarahs real income rises from $35,867 to $36,730. 15. a Real income = (Nominal income/CPI) x 100. 16. c This is the definition of inflation. 17. b The salary in Year 10 = salary in Year 1 x (CPI in Year 10/CPI in Year 1). 18. a. the real interest rate falls from 3% to 2%. 19. b. overstate changes in the cost of living. 20. c. measures the cost of goods and services bought by a typical consumer.

Page 4 of 4