Q: If the CPI in 2023 is 120, in 2024 is 150, and in 2025 is 175, what is the inflation rate from 2024 to 2025? Use the formula $$\text{Inflation Rate} = \frac{\text{CPI}_{\text{this year}} - \text{CPI}_{\text{last year}}}{\text{CPI}_{\text{last year}}} \times 100.$$

$$\frac{175 - 150}{150} \times 100 = 16.67\%$$

Q: A student wants to compare the purchasing power of the minimum wage in 1964 ($$1.15) to that in 2025 (7.25). $$The CPI in 1964 is 31.0 and in 2025 is 322.0. What is the 1964 minimum wage in 2025 dollars? Use the formula $$\text{Amount in today's dollars} = \text{Amount in year } t \times \frac{\text{CPI today}}{\text{CPI in year } t}.$$

$$1.15 \times \frac{322.0}{31.0} = 11.94$$

Question 1

Suppose the price of beef rises significantly while the price of chicken remains stable. According to the concept of substitution bias in the Consumer Price Index (CPI), what is the likely effect on the measured inflation rate?

Accepted Answer

The CPI will overstate the true increase in the cost of living because it does not account for consumers substituting chicken for beef.

Question 2

Which of the following is included in the CPI but NOT in the GDP deflator?

Accepted Answer

Imported consumer goods

Question 3

If the CPI in 2023 is 120, in 2024 is 150, and in 2025 is 175, what is the inflation rate from 2024 to 2025? Use the formula $$	ext{Inflation Rate} = \frac{	ext{CPI}_{	ext{this year}} - 	ext{CPI}_{	ext{last year}}}{	ext{CPI}_{	ext{last year}}} 	imes 100.$$

Accepted Answer

$$\frac{175 - 150}{150} 	imes 100 = 16.67\%$$

Question 4

A student wants to compare the purchasing power of the minimum wage in 1964 ($$1.15) to that in 2025 (7.25). $$The CPI in 1964 is 31.0 and in 2025 is 322.0. What is the 1964 minimum wage in 2025 dollars? Use the formula $$	ext{Amount in today's dollars} = 	ext{Amount in year } t 	imes \frac{	ext{CPI today}}{	ext{CPI in year } t}.$$

Accepted Answer

$$1.15 	imes \frac{322.0}{31.0} = 11.94$$

Question 5

Which of the following best describes the difference between nominal and real interest rates?

Accepted Answer

Nominal interest rates are not corrected for inflation, while real interest rates are.

Question 6

Suppose you deposit $$1,000 in a bank account for one year. The nominal interest rate is 9%, and the inflation rate is 3.5%. What is your real interest rate? Use the formula $$	ext{Real Interest Rate} = 	ext{Nominal Interest Rate} - 	ext{Inflation Rate}$.

Accepted Answer

$$9\% - 3.5\% = 5.5\%$$

Question 7

Which of the following policies is most likely to increase a country's long-run economic growth rate?

Accepted Answer

Encouraging foreign direct investment

Question 8

A country has the following data (in trillions): $$Y = 10$$, $$C = 6.5$$, $$G = 2$$, $$T = 1.7. $$What is the value of private saving? Use the formula $$	ext{Private Saving} = Y - T - C.$$

Accepted Answer

$$10 - 1.7 - 6.5 = 1.8$$

Question 9

Which of the following is an example of crowding out in the loanable funds market?

Accepted Answer

A government budget deficit raises interest rates, reducing private investment.

Question 10

If a country increases its average years of schooling, what is the most likely effect on its productivity and long-run economic growth?

Accepted Answer

Productivity will increase, leading to higher long-run economic growth.

Question 11

Which of the following best explains why knowledge is considered a public good in the context of economic growth?

Accepted Answer

Knowledge can be consumed by one person without reducing its availability to others.

Question 12

A bond with a high probability of default will most likely have which of the following characteristics?

Accepted Answer

A higher interest rate to compensate for risk

Question 13

Which of the following is NOT a function of financial institutions in the economy?

Accepted Answer

Setting the nominal interest rate for the entire economy

Question 14

Suppose the government introduces an investment tax credit. What is the likely effect on the market for loanable funds?

Accepted Answer

The demand for loanable funds will increase, raising the equilibrium interest rate.

Question 15

Which of the following best describes the effect of unmeasured quality changes on the CPI?

Accepted Answer

The CPI overstates the true cost of living because it does not fully account for quality improvements.

Question 16

If a country adopts outward-oriented trade policies, what is the most likely long-term effect?

Accepted Answer

Higher productivity and living standards due to integration with the world economy

Question 17

Which of the following is an example of public saving?

Accepted Answer

Tax revenue minus government spending

Question 18

A country has a GDP ($$Y) of$$ $$10$$ trillion, consumption ($$C) of$$ $$6.5$$ trillion, government spending ($$G) of$$ $$2$$ trillion, and taxes ($$T) of$$ $$1.7$$ trillion. What is the value of national saving? Use the formula $$	ext{National Saving} = Y - C - G.$$

Accepted Answer

$$10 - 6.5 - 2 = 1.5$$ trillion

Question 19

Which of the following is a direct result of an increase in the supply of loanable funds?

Accepted Answer

A decrease in the equilibrium interest rate

Question 20

If a country experiences a technological breakthrough that increases productivity, what is the most likely effect on real GDP per worker?

Accepted Answer

Real GDP per worker will increase due to higher output from the same resources.

Measuring the Cost of Living, Economic Growth, and Financial Institutions

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