Question

1.If the price index increases from 120 to 130 then the inflation rate during the past year was 10%. True or False

2.If the price index has a value of 122 then the inflation rate during the past year must have been 22%. True or False

3.The GDP deflator is used to calculate the inflation rate. True or False

4.

You deposit $900 in a savings account and one year later you have $945. At the same time, the CPI increases from 200 to 206. The nominal interest rate is ----% and the real interest rate is ----%.

Enter whole numbers.

5.Consider an economy in which the rate of inflation is always positive. If the price index had a value of 134 in the year 2010 then the base year used to calculate the price index is some year before 2010. True or False

6.Across a 10 year period John finds his income has increased by 35% while at the same time prices of the goods and services he buys have increased by 45%. John feels like his purchasing power has declined. True or False

Answer 1

1. Ans: False

Explanation:

Inflation rate = [(130 - 120) / 120] * 100 = 8.33%. Thus, the statement is false.

2. Ans: False

Explanation:

We can not calculate inflation rate without knowing previous year price index. Thus, the statement is false.

3. Ans: True

4. Nominal interest rate = [(945 - 900) / 900] * 100 = 5%

Inflation rate = [(206 - 200) / 200] * 100 = 3%

Real interest rate = Nominal interest rate - Inflation rate = 5% - 3% = 2%

5. Ans: True

Explanation:

If in 2010, price index is 134, the inflation rate will be positive only if the base year used to calculate the price index is some year before 2010. Thus, the statement is true.

6. Ans: True