Question

1. Which of the following statement about the CPI is not correct?

a. the CPI tracks changes in the price of import goods.

b. the CPI tracks changes in the price of export goods.

c. the CPI is based on the same set of goods over a multi-year period.

d. the CPI only includes consumption goods – it does not include capital investment goods.

2. Suppose 60% of money is held as currency and the reserve ratio is 0.3. The money multiplier is

a. 1/0.72 b. 1/0.3 c. 1/0.6 d. 1/0.18

3. Suppose nominal GDP in 2008 was greater than real GDP in 2008. Given this information, we know with certainty that

a. the GDP deflator in 2008 was greater than the GDP deflator in the base year.

b. the GDP deflator in 2008 was less than the GDP deflator in the base year.

c. real GDP in 2008 was less than real GDP in the base year.

d. real GDP in 2008 was greater than real GDP in the base year

Answer 1

1. Option B. the CPI tracks changes in the price of export goods.

Explanation: CPI is consumer price index and it only considers the price of goods which affect the domestic households. Therefore, CPI considers the price of import goods as the price of import goods affect domestic consumers. CPI does not consider the price of export goods as the price of export goods affect foreign households and not domestic households.

2. B. 1/0.3

Explanation: The formula of money multiplier = 1/ reserve ratio. So, money multiplier, in this case, = 1/0.3

3. A. the GDP deflator in 2008 was greater than the GDP deflator in the base year.

Explanation: GDP deflator = Nominal GDP/ Real GDP * 100

In the base year, GDP deflator is 100 as nominal GDP and real GDP are same in the base year.

In 2008, GDP deflator is greater than 100 as Nominal GDP is higher than the Real GDP in 2008.

So, the GDP deflator in 2008 was greater than the GDP deflator in the base year.