Inflation questions: 1
Suppose a typical consumer buys the following quantities of three commodities in
2006 and 2007.
Commodity
Food
Clothing
Shelter
Quantity
10 units
4 units
6 units
2006 per
Unit price
$6.00
$7.00
$12.00
2007 per
Unit price
$5.00
$9.00
$19.00
Which of the following can be concluded about the consumer price index (CPI)
for this individual from 2006 to 2007?
A. It remained unchanged
B. It decreased by 25%
Build the cost of the market
C. It decreased by 20%
basket for both 93 and 94.
D. It increased by 20%
E. It increased by 25%
Then do your math.
Inflation questions: 2
Period
Real Gross
Domestic Product
Nominal Gross
Domestic Product
Year 1
Year 2
Year 3
$100 billion
$120 billion
$130 billion
$70 billion
$120 billion
$150 billion
Which of the following can be concluded from the data above?
(A) The base year for the price index was year 1.
(B) The base year for the price index was year 3.
(C) The economy was producing higher-quality goods and services in
years 2 and 3 than in year 1.
(D) The economy was experiencing inflation during years 2 and 3.
(E) The economy was experiencing deflation during years 1, 2, and 3.
Inflation questions: 3
The consumer price index (CPI) is designed to
measure changes in the
(A) spending patterns of urban consumers only
(B) spending patterns of all consumers
(C) wholesale price of manufactured goods
(D) prices of all goods and services produced in
an economy
(E) cost of a select market basket of goods and
services
Inflation questions: 4
Inflation occurs when there is a sustained
increase in which of the following?
(A) Real gross domestic product
(B) The average price level
(C) The price of any commodity
(D) Labor productivity
(E) The unemployment rate
Inflation questions: 5
The consumer price index (CPI) is criticized for
(A) overstating the true burden of inflation because it does not recognize
consumers’ ability to substitute goods and services as prices change
(B) overstating the true burden of inflation because it recognizes
consumers’ ability to substitute goods and services as prices change
(C) understating the true burden of inflation because it does not recognize
consumers’ ability to substitute goods and services as prices change
(D) understating the true burden of inflation because it recognizes
consumers’ ability to substitute goods and services as prices change
(E) over stating the true burden of inflation because it reflects the prices of
both intermediate goods and final goods
Inflation questions: 6
Assume that the nominal interest rate is 10 percent. If
the expected inflation rate is 5 percent, the real
interest rate is
(A) 0.5%
(B) 2%
(C) Between 3.5% and 4.2%
(D) 5%
(E) 10%
Inflation questions: 7
If in a given year nominal gross domestic product
grew by 12 percent and real gross domestic product
grew by 5 percent, inflation for this year would be:
A. –7%
B. 7%
C. 8%
D. 11%
E. 15%
Inflation Hurt/Helped ? 8
Which of the following groups would most likely gain
from unanticipated inflation?
(A) Landlords who own apartments in cities with rent
controls
(B) Individuals who have fixed retirement incomes
(C) Individuals who earn high incomes
(D) Individuals who have borrowed money at fixed
interest rates
(E) Banks that have loaned all excess reserves at a
fixed interest rate
Inflation Hurt/Helped ? 9
Which of the following statements is true of
unanticipated inflation?
(A) It decreases the economic well-being of all
members of society proportionately.
(B) It decreases the economic well-being of all
members of society equally.
(C) It increases the economic well-being of net
creditors.
(D) It increases the economic well-being of net
debtors.
(E) It increases the economic well-being of
workers with long-term labor contracts.
Inflation Hurt/Helped ? 10
Public policy that generates an unexpected increase in
consumer prices will inflict short-run costs on all of
the following EXCEPT
(A) borrowers
(B) workers with fixed incomes
(C) savers holding non-interest-bearing money
(D) taxpayers shifted into higher tax brackets
(E) people whose incomes are not adjusted for inflation
Answers 1 - 10
1. (e) 25%. Multiple the quantities by one years prices and sum, then the
second year’s prices sum and find % difference with the first year as
the base.
2. (d) When Real = Nominal you are in the base year.
3. (e) CPI uses a fixed market basket. The GDP deflator uses all the
goods and services produced that year.
4. (b) Inflation is an weighted* average of price changes.
5. (a) CPI doesn’t recognize substitution.
6. (d) nominal - inflation = real
7. (b) nominal - inflation = real
8. (d) borrowers helped as inflation boosts their incomes and reduces
burden of fixed loan payments.
9. (d) same as 8
10. (a) same as 8 and 9.
*Weighted: if you buy 2 of something you count it twice, if you buy five of another
you count it 5 times. A weight of 2 and a weight of 5. For the CPI, food price
changes get counted at a weight of .15 and 15% of a typical household’s income
goes for food. Housing at .41.