Chapter 11: Consumer Price Index, Real Interest Rates, GDP
1. Which of the following is correct?
a. The GDP deflator is better than the CPI at reflecting the goods and services bought by
consumers.
b. The CPI is better than the GDP deflator at reflecting the goods and services bought by
consumers.
c. The GDP deflator and the CPI are equally good at reflecting the goods and services bought
by consumers.
d. The GDP deflator is more commonly used as a gauge of inflation than the CPI is.
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3. Which of the following changes in the price index produces the greatest rate of inflation: 100 to 110, 150
to 165, or 180 to 198?
a. 100 to 110
b. 150 to 165
c. 180 to 198
d. All of these changes produce the same rate of inflation.
Table 24-2
The table below pertains to Iowan, an economy in which the typical consumer’s basket consists of 3
pounds of pork and 4 bushels of corn.
Year
2008
2009
Price of
Pork
$20 per pound
$25 per pound
Price of
Corn
$12 per bushel
$18 per bushel
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4. Refer to Table 24-2. If 2008 is the base year, then the inflation rate in 2009 was
a. 26.5 percent.
b. 36.1 percent.
c. 39 percent.
d. 47 percent.
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6. The consumer price index tries to gauge how much incomes must rise to maintain
a. an increasing standard of living.
b. a constant standard of living.
c. a decreasing standard of living.
d. the highest standard of living possible.
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7. Ruben earned a salary of $60,000 in 2001 and $80,000 in 2006. The consumer price index was 177 in
2001 and 221.25 in 2006. Ruben's 2006 salary in 2001 dollars is
a. $20,000; thus, Ruben's purchasing power increased between 2001 and 2006.
b. $20,000; thus, Ruben's purchasing power decreased between 2001 and 2006.
c. $64,000; thus, Ruben's purchasing power increased between 2001 and 2006.
d. $64,000; thus, Ruben's purchasing power decreased between 2001 and 2006.
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8. If the nominal interest rate is 1.5 percent and the rate of inflation is -0.5 percent, then the real interest rate
is
a. -4 percent.
b. -2 percent.
c. 1 percent.
d. 2 percent.
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9. Maxine deposits $100 in a bank account that pays an annual interest rate of 20%. A year later, after
Maxine has accumulated $20 in interest, she withdraws her $120. Maxine’s purchasing power
a. did not change if the inflation rate was 0%.
b. decreased if the inflation rate was -2%.
c. increased if the inflation rate was 5%.
d. More than one of the above is correct.
8. U.S. GDP and U.S. GNP are related as follows:
a. GNP = GDP + Value of exported goods - Value of imported goods.
b. GNP = GDP - Value of exported goods + Value of imported goods.
c. GNP = GDP + Income earned by foreigners in the U.S. - Income earned by U.S. citizens
abroad.
d. GNP = GDP - Income earned by foreigners in the U.S. + Income earned by U.S. citizens
abroad.
____ 16. Consider two items that might be included in GDP: (1) the estimated rental value of owner-occupied
housing and (2) purchases of newly-constructed homes. How are these two items accounted for when
GDP is calculated?
a. Both item (1) and item (2) are included in the consumption component of GDP.
b. Item (1) is included in the consumption component of GDP, while item (2) is included in
the investment component of GDP.
c. Item (1) is included in the investment component of GDP, while item (2) is included in the
consumption component of GDP.
d. Only item (2) is included in GDP, and it is included in the investment component.
____ 17. Goods that go into inventory and are not sold during the current period are
a. counted as intermediate goods and so are not included in current period GDP.
b. counted in current period GDP only if the firm that produced them sells them to another
firm.
c. included in current period GDP as inventory investment.
d. included in current period GDP as consumption.
____ 18. Transfer payments are
a. included in GDP because they represent income to individuals.
b. included in GDP because they eventually will be spent on consumption.
c. not included in GDP because they are not payments for currently produced goods or
services.
d. not included in GDP because taxes will have to be raised to pay for them.
____ 19.
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____ 20. 19. In the economy of Wrexington in 2008, consumption was $5300, GDP was $8800,
government purchases were $1800, imports were $500, and investment was $2000. What
were Wrexington’s exports in 2008?
a. -$800
b. -$300
c. $200
d. $300
Table 23-2
The table below contains data for the country of Wrexington for the year 2008.
Household purchases of durable goods
Household purchases of nondurable goods
Household purchases of services
Household purchases of new housing
Purchases of capital equipment
Inventory changes
Purchases of new structures
Depreciation
Salaries of government workers
Government expenditures on public works
Transfer payments
Foreign purchases of domestically produced goods
Domestic purchases of foreign goods
$1293
$1717
$301
$704
$310
$374
$611
$117
$1422
$553
$777
$88
$120
____ 21. Refer to Table 23-2. What was Wrexington’s consumption in 2008?
a. $2018
b. $3010
c. $3311
d. $4015
24.
The
____ 25. In the economy of Wrexington in 2008, real GDP was $5 trillion and the GDP deflator
was 200. What was Wrexington’s nominal GDP in 2008?
a. $2.5 trillion
b. $10 trillion
c. $40 trillion
d. $ The table below contains data for the country of Dachsland, which produces only
pretzels and books. The base year is 2005.
____ 26.
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