Q: The formula for calculating the inflation rate between two periods using a price index is:

$$ ((\text{Index}_t - \text{Index}_{t-1}) / \text{Index}_{t-1}) \times 100 $$

Q: If you want to compare the value of a salary from 1909 to its equivalent in 2016 dollars, which formula should you use?

$$ \text{Value in current dollars} = \text{Old dollars} \times (\text{Current price index} / \text{Old price index}) $$

Q: Suppose the CPI in 2022 was 260 and in 2023 it was 273. What was the inflation rate from 2022 to 2023?

$$ ((273 - 260) / 260) \times 100 = 5\% $$

Question 1

Suppose a drought in Brazil causes a large reduction in the output of the world’s largest coffee producer. Based on the supply and demand diagram for coffee, what will happen to the equilibrium price and quantity of coffee?

Accepted Answer

Equilibrium price will increase and equilibrium quantity will decrease.

Question 2

If the price of plums increases and the demand for apples increases, what is the relationship between plums and apples?

Accepted Answer

They are substitutes.

Question 3

Nominal GDP is defined as:

Accepted Answer

The total value of production using current market prices.

Question 4

Which of the following best describes the GDP deflator?

Accepted Answer

A measure of the average change in prices of all goods and services included in GDP.

Question 5

The formula for calculating the inflation rate between two periods using a price index is:

Accepted Answer

$$ ((	ext{Index}_t - 	ext{Index}_{t-1}) / 	ext{Index}_{t-1}) 	imes 100 $$

Question 6

Which price index is 'chain weighted' and adjusts the weights of goods and services as consumption patterns change?

Accepted Answer

Personal Consumption Expenditures (PCE) Price Index

Question 7

If you want to compare the value of a salary from 1909 to its equivalent in 2016 dollars, which formula should you use?

Accepted Answer

$$ 	ext{Value in current dollars} = 	ext{Old dollars} 	imes (	ext{Current price index} / 	ext{Old price index}) $$

Question 8

Which of the following is TRUE about the Consumer Price Index (CPI)?

Accepted Answer

It is released monthly by the Bureau of Labor Statistics (BLS).

Question 9

Which of the following best explains why the Core CPI is used as a measure of underlying inflation trends?

Accepted Answer

It excludes food and energy prices to focus on more stable components.

Question 10

Suppose the CPI in 2022 was 260 and in 2023 it was 273. What was the inflation rate from 2022 to 2023?

Accepted Answer

$$ ((273 - 260) / 260) 	imes 100 = 5\% $$

Question 11

If the demand for donuts decreases, as shown in the donut market diagram, what happens to the equilibrium price and quantity?

Accepted Answer

Equilibrium price decreases and equilibrium quantity decreases.

Question 12

Which of the following is a key difference between the CPI and the PCE price index?

Accepted Answer

The PCE price index adjusts for changes in consumption patterns, while the CPI does not.

Question 13

The Producer Price Index (PPI) is best described as:

Accepted Answer

A measure of the prices firms are paying for inputs into production.

Question 14

If real GDP increases but nominal GDP increases by a larger percentage, what does this imply about the price level?

Accepted Answer

The price level has increased.

Question 15

Which of the following is NOT included in the calculation of the GDP deflator?

Accepted Answer

Imported goods.

Question 16

If the PPI increases significantly before the CPI, what might this indicate?

Accepted Answer

Producer prices are rising, which may lead to higher consumer prices in the future.

Question 17

Which of the following best describes 'headline' inflation?

Accepted Answer

It includes all items, including food and energy.

Question 18

If Taft earned $$75,000 in 1909 and the price index was 9, while Obama earned 400$$,000 in 2016 with a price index of 228, what was Taft’s salary in 2016 dollars?

Accepted Answer

$$ 75,000 	imes (228 / 9) = 1$$,900,000 $

Question 19

Which of the following is a reason why the CPI might overstate the true cost of living?

Accepted Answer

It does not account for consumers substituting cheaper goods when prices change.

Measuring Inflation and Real vs. Nominal Changes in Macroeconomics

Study Guide - Practice Questions

Study Guide - Flashcards