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 / Price of
Pork / Price of
Corn
2008 / $20 per pound / $12 per bushel
2009 / $25 per pound / $18 per bushel

____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.

____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.

____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.

____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.
____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 / $1293
Household purchases of nondurable goods / $1717
Household purchases of services / $301
Household purchases of new housing / $704
Purchases of capital equipment / $310
Inventory changes / $374
Purchases of new structures / $611
Depreciation / $117
Salaries of government workers / $1422
Government expenditures on public works / $553
Transfer payments / $777
Foreign purchases of domestically produced goods / $88
Domestic purchases of foreign goods / $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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