Q: Suppose the Consumer Price Index (CPI) was 220 in 2020 and 242 in 2022. What was the inflation rate over this period? Use the formula $$\text{Inflation Rate} = \frac{\text{CPI}_{\text{new}} - \text{CPI}_{\text{old}}}{\text{CPI}_{\text{old}}} \times 100.$$

$$\frac{242 - 220}{220} \times 100 = 10\%$$

Q: Suppose your mother earned $$30,000 in 1997. If the CPI was 160 in 1997 and 291 in 2022, what is the equivalent value of her 1997 salary in 2022 dollars? Use the formula $$\text{Value in 2022 dollars} = \text{Value in 1997 dollars} \times \frac{\text{CPI}_{2022}}{\text{CPI}_{1997}}$.

$$30,000 \times \frac{291}{160} = 54$$,562.50$

Question 1

Which of the following best describes 'disinflation'?

Accepted Answer

A reduction in the rate of inflation, but prices are still rising.

Question 2

Suppose the Consumer Price Index (CPI) was 220 in 2020 and 242 in 2022. What was the inflation rate over this period? Use the formula $$	ext{Inflation Rate} = \frac{	ext{CPI}_{	ext{new}} - 	ext{CPI}_{	ext{old}}}{	ext{CPI}_{	ext{old}}} 	imes 100.$$

Accepted Answer

$$\frac{242 - 220}{220} 	imes 100 = 10\%$$

Question 3

Which of the following is NOT a drawback of the Consumer Price Index (CPI) as a measure of inflation?

Accepted Answer

It includes changes in medical costs paid by Medicare and Medicaid

Question 4

If the nominal interest rate on a savings account is 4% and the inflation rate is 6%, what is the real interest rate? Use the formula $$	ext{Real Interest Rate} = 	ext{Nominal Interest Rate} - 	ext{Inflation Rate}.$$

Accepted Answer

$$4\% - 6\% = -2\%$$

Question 5

Who is most likely to be hurt by unanticipated inflation?

Accepted Answer

A bank that extends many fixed-rate loans

Question 6

Suppose your mother earned $$30,000 in 1997. If the CPI was 160 in 1997 and 291 in 2022, what is the equivalent value of her 1997 salary in 2022 dollars? Use the formula $$	ext{Value in 2022 dollars} = 	ext{Value in 1997 dollars} 	imes \frac{	ext{CPI}_{2022}}{	ext{CPI}_{1997}}$.

Accepted Answer

$$30,000 	imes \frac{291}{160} = 54$$,562.50$

Question 7

Which of the following scenarios best illustrates the concept of 'deflation'?

Accepted Answer

The overall price level decreases by 2%.

Question 8

Why is deflation considered more dangerous for an economy than moderate inflation?

Accepted Answer

Deflation can lead to postponed purchases, reduced production, and higher unemployment.

Question 9

If the CPI overstates the true inflation rate due to substitution bias, what is the likely effect on cost-of-living adjustments (COLA) for workers?

Accepted Answer

COLA increases will be too high, increasing workers' real income.

Question 10

Which of the following best describes 'core inflation'?

Accepted Answer

The inflation rate excluding food and energy prices.

Question 11

A retired couple lives entirely on income from a fixed-rate pension. What is the likely impact of unanticipated inflation on their purchasing power?

Accepted Answer

Their purchasing power will decrease.

Question 12

Which of the following is an example of 'hyperinflation'?

Accepted Answer

An inflation rate of 100% per year.

Question 13

If nominal average hourly earnings are $$20 and the CPI is 250, what are the real average hourly earnings? Use the formula $$	ext{Real Earnings} = \frac{	ext{Nominal Earnings}}{	ext{CPI}} 	imes 100$.

Accepted Answer

$$\frac{20}{250} 	imes 100 = 8$$

Question 14

Which of the following groups is most likely to benefit from unanticipated inflation?

Accepted Answer

Debtors with fixed-rate loans

Question 15

The Personal Consumption Expenditures (PCE) index is preferred by the Federal Reserve over the CPI because:

Accepted Answer

It is broader and includes more categories of spending.

Question 16

If the inflation rate is negative, which of the following is true?

Accepted Answer

The economy is experiencing deflation.

Question 17

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

Accepted Answer

It does not account for substitution toward cheaper goods.

Question 18

A state government receives most of its revenue from income taxes. How is it likely to be affected by unanticipated inflation?

Accepted Answer

It will benefit because tax revenues will rise with nominal incomes.

Question 19

Which of the following is a likely consequence of deflation in an economy?

Accepted Answer

Delayed purchases and higher unemployment

Inflation: Measurement, Causes, and Consequences

Study Guide - Practice Questions

Study Guide - Flashcards