$$ \frac{(220 - 200)}{200} \times 100 = 10\% $$

$$ \frac{650}{500} \times 100 = 130 $$

$$ \frac{(9.00 - 4.50)}{4.50} \times 100 = 100\% $$

Question 1

Suppose the Consumer Price Index (CPI) was 200 in 2020 and 220 in 2021. What was the inflation rate between 2020 and 2021?

Accepted Answer

$$ \frac{(220 - 200)}{200} 	imes 100 = 10\% $$

Question 2

If the cost of a market basket in the base year is $$500 and in the current year is 650$$, what is the CPI for the current year?

Accepted Answer

$$ \frac{650}{500} 	imes 100 = 130 $$

Question 3

Which of the following best describes the substitution bias in the CPI?

Accepted Answer

The CPI overstates the cost of living because it assumes consumers buy the same fixed basket even when relative prices change.

Question 4

A worker’s nominal wage increased from $$20 to 22 $$per hour, while the CPI increased from 200 to 220. What happened to the worker’s real wage?

Accepted Answer

The real wage stayed the same.

Question 5

If the nominal interest rate is 8% and the inflation rate is 5%, what is the real interest rate?

Accepted Answer

$$ 8\% - 5\% = 3\% $$

Question 6

During a period of unanticipated inflation, who is most likely to benefit?

Accepted Answer

Borrowers, because they repay loans with money that is worth less.

Question 7

If the CPI in 1980 was 100 and in 2026 is 333, what does this indicate about the cost of the market basket?

Accepted Answer

The cost of the market basket has increased by 233% since 1980.

Question 8

Which price index is most commonly used by the Federal Reserve for its average inflation target?

Accepted Answer

Personal Consumption Expenditure Price Index (PCE)

Question 9

Suppose you borrow $1,000 at a nominal interest rate of 5%. If the actual inflation rate is 7%, what is the real interest rate?

Accepted Answer

$$ 5\% - 7\% = -2\% $$

Question 10

Which of the following is a problem caused by deflation?

Accepted Answer

Consumers reduce spending, waiting for even lower prices.

Question 11

If the nominal interest rate is 4% and the inflation rate is -2% (deflation), what is the real interest rate?

Accepted Answer

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

Question 12

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

Accepted Answer

It uses a fixed market basket and does not account for consumers substituting cheaper goods.

Question 13

A country experiences hyperinflation. Which of the following is most likely to occur?

Accepted Answer

People may use money for purposes other than spending, such as burning it for heat.

Question 14

If the cost of a Big Mac rises from $$4.50 to 9.00 $$due to inflation, what is the percentage increase in price?

Accepted Answer

$$ \frac{(9.00 - 4.50)}{4.50} 	imes 100 = 100\% $$

Question 15

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

Accepted Answer

Intermediate goods and services

Question 16

If actual inflation is less than expected inflation, who gains and who loses?

Accepted Answer

Lenders gain, borrowers lose.

Question 17

Which formula correctly converts a nominal wage to a real wage using the CPI?

Accepted Answer

$$ 	ext{Real Wage} = \frac{	ext{Nominal Wage}}{	ext{CPI}} 	imes 100 $$

Question 18

Which of the following is a direct consequence of menu costs?

Accepted Answer

Firms must update prices more frequently, increasing their costs.

Question 19

If the nominal interest rate is 6% and the expected inflation rate is 4%, what is the expected real interest rate?

Accepted Answer

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

Question 20

Which of the following best describes the GDP deflator?

Accepted Answer

A measure of the price level calculated by dividing nominal GDP by real GDP.

Chapter 9 Study Guide- Part B

Study Guide - Practice Questions