Question

13. In an imaginary economy, consumers buy only hot dogs and hamburgers. The fixed basket consists of 10 hot dogs and 6 hamburgers. A hot dog cost $3 in 2006 and $5.40 in 2007. A hamburger cost $5 in 2006 and $6 in 2007. Which of the following statements is correct?

a. When 2006 is chosen as the base year, the consumer price index is 90 in 2007.

b. When 2006 is chosen as the base year, the inflation rate is 50 percent in 2007.

c. When 2007 is chosen as the base year, the consumer price index is 100 in 2006.

d. When 2006 is chosen as the base year, the inflation rate is 50 percent in 2007.

14. The CPI was 120 in 2000 and 132 in 2001. Dorgan borrowed money in 2000 and repaid the loan in 2001. If the nominal interest rate on the loan was 12 percent, then the real interest rate was

a. 2 percent.

b. 10 percent.

c. 12 percent.

d. 22 percent

15. By not taking into account the possibility of consumer substitution, the CPI

a. understates the cost of living.

b. overstates the cost of living.

c. may overstate or understate the cost of living, depending on how much prices rise.

d. may overstate or understate the cost of living, regardless of the extent to which prices rise

16. You know that a candy bar cost five cents in 1962. You also know the CPI for 1962 and the CPI for today. Which of the following would you use to compute the price of the candy bar in today's prices?

a. five cents × (1962 CPI/ today's CPI)

b. five cents × (1962 CPI/(today's CPI - 1962 CPI))

c. five cents × (today's CPI/1962 CPI)

d. five cents × today's CPI - five cents × 1962 CPI.

17. The nominal interest rate tells you

a.   how fast the number of dollars in your bank account rises over time.

b.   how fast the purchasing power of your bank account rises over time.

c.   the number of dollars in your bank account today.

d.   the purchasing power in your bank account today.

18. Consider two countries. Country A has a population of 1,000, of whom 800 work 8 hours a day to make 128,000 final goods. Country B has a population of 2,000 of whom 1,800 work 6 hours a day to make 270,000 final goods

a.   Country A has higher productivity and higher real GDP per person than country B.

b.   Country A has lower productivity and lower real GDP per person than country B.

c.   Country A has higher productivity, but lower real GDP per person than country B.

d.   Country B has lower productivity, but higher real GDP per person than country B.

19. The Peapod Restaurant uses all of the following to produce vegetarian meals. Which of them is an example of physical capital?

a. The owner's knowledge of how to prepare vegetarian entrees.

b. The money in the owner's account at the bank she borrowed money from.

c. The tables and chairs in the restaurant.

d. The land the restaurant was built on.

20. In a particular country in 1998, the average worker needed to work 25 hours to produce 40 units of output. In that same country in 2008, the average worker needed to work 40 hours to produce 68 units of output. In that country, the productivity of the average worker

a. decreased by 1. 7 percent between 1998 and 2008.

b. remained unchanged between 1998 and 2008.

c. increased by 4. 75 percent between 1998 and 2008.

d. increased by 6. 25 percent between 1998 and 2008

Answer 1

13.) D.) When 2006 is chosen as the base year, the inflation rate is 50 percent in 2007.

Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. Central banks attempt to limit inflation, and avoid deflation, in order to keep the economy running smoothly.

14.) A.) 2 percent

The real interest rate is the rate of interest an investor, saver or lender receives (or expects to receive) after allowing for inflation. It can be described more formally by the Fisher equation, which states that the real interest rate is approximately the nominal interest rate minus the inflation rate.

15.) C.) May overstate or understate the cost of living, depending on how much prices rise.

Consumer price index (CPI) measures changes in the price level of market basket of consumer goods and services purchased by households. The CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically.

Cost of living is the cost of maintaining a certain standard of living. Changes in the cost of living over time are often operationalized in a cost of living index.

16.) A.) Five cents × (1962 CPI/ today's CPI)

Consumer price index (CPI) measures changes in the price level of market basket of consumer goods and services purchased by households.

17.) A.) How fast the number of dollars in your bank account rises over time.

Nominal interest rate refers to the interest rate before taking inflation into account. Nominal can also refer to the advertised or stated interest rate on a loan, without taking into account any fees or compounding of interest.