Week 5 In Class Exercise – Consumer Price Index and Real Interest Rates

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.

____2.The price index was 110 in the first year, 100 in the second year, and 96 in the third year. The economy experienced

a. / 9.1 percent deflation between the first and second years, and 4 percent deflation between the second and third years.
b. / 9.1 percent deflation between the first and second years, and 4.2 percent deflation between the second and third years.
c. / 10 percent deflation between the first and second years, and 4 percent deflation between the second and third years.
d. / 10 percent deflation between the first and second years, and 4.2 percent deflation between the second and third years.

____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.

____5.If the cost of food & beverages increases by 20 percent, then, other things the same, the CPI is likely to increase by about

a. / 3 percent.
b. / 15 percent.
c. / 20 percent.
d. / 30 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.

____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.

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