Question 1

Which of the following best describes the main difference between the Consumer Price Index (CPI) and the GDP deflator?

Accepted Answer

The CPI measures the prices of goods and services purchased by consumers, while the GDP deflator measures the prices of all domestically produced final goods and services.

Question 2

Suppose the CPI in 2023 is 140 and the CPI in 2024 is 147. What is the inflation rate between 2023 and 2024? Use the formula $$ \pi_t = \frac{CPI_t - CPI_{t-1}}{CPI_{t-1}} 	imes 100 .$$

Accepted Answer

4.1%

Question 3

Which of the following is NOT a function of money?

Accepted Answer

Source of production

Question 4

If the nominal interest rate on a savings account is 5% and the inflation rate is 2%, what is the approximate real interest rate? Use the formula $$ r \approx i - \pi .$$

Accepted Answer

3%

Question 5

A worker earned $$40,000 in 2019 when the CPI was 130. If the CPI in 2024 is 156, what is the worker's 2019 income in 2024 dollars? Use the formula $$ 	ext{Value in today dollars} = 	ext{Nominal}_{	ext{past}} 	imes \frac{CPI_{	ext{today}}}{CPI_{	ext{past}}} $.

Accepted Answer

$48,000

Question 6

Which of the following best explains why the CPI may overstate the true increase in the cost of living?

Accepted Answer

It is based on a fixed basket and does not account for substitution or new goods.

Question 7

If nominal wage growth is 6% and inflation is 4%, what is the approximate real wage growth? Use the formula $$ 	ext{Real growth} \approx 	ext{Nominal growth} - 	ext{Inflation} .$$

Accepted Answer

2%

Question 8

Which of the following scenarios best illustrates the concept of 'nominal' versus 'real' values?

Accepted Answer

A worker's salary remains at $50,000 for ten years, but the cost of living doubles during that time.

Question 9

The GDP deflator in 2022 is 120 and in 2023 it is 126. What is the inflation rate according to the GDP deflator? Use the formula $$ \pi_t = \frac{Deflator_t - Deflator_{t-1}}{Deflator_{t-1}} 	imes 100 .$$

Accepted Answer

5.0%

Question 10

Which of the following is most likely to cause the CPI to be more volatile than the CPI excluding food and energy, as shown in the provided graph?

Accepted Answer

Food and energy prices tend to fluctuate more than other prices.

Question 11

If the CPI basket does not update to include new technology products quickly, what bias does this introduce?

Accepted Answer

New goods bias

Question 12

A country’s nominal GDP increased by 8% from one year to the next, while the GDP deflator increased by 3%. What is the approximate real GDP growth rate?

Accepted Answer

5%

Question 13

Which of the following best describes why it is important to distinguish between nominal and real interest rates when saving for retirement?

Accepted Answer

Real interest rates account for inflation, showing the actual increase in purchasing power.

Question 14

If the CPI in 2010 was 110 and in 2020 it was 154, what is the percentage increase in the cost of living over this period? Use the formula $$ \frac{CPI_{2020} - CPI_{2010}}{CPI_{2010}} 	imes 100 .$$

Accepted Answer

40%

Question 15

Which of the following is an example of substitution bias in the CPI?

Accepted Answer

Consumers buy more chicken when beef prices rise, but the CPI basket still assumes the same amount of beef is purchased.

Question 16

If a loan has a nominal interest rate of 4% and the inflation rate is 5%, what is the real interest rate? Use the formula $$ r \approx i - \pi .$$

Accepted Answer

-1%

Question 17

Which of the following statements about the CPI-Median, as shown in the graph, is correct?

Accepted Answer

CPI-Median tracks the 50th percentile of the basket and is less affected by extreme price changes.

Inflation and the Price Level: Measurement, Effects, and Adjustments

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