Q: If the cost of the market basket in the base year is $$200 and in the current year is 250$$, what is the CPI for the current year?

$$CPI = \frac{250}{200} \times 100 = 125$$

Q: The inflation rate for 2026 is calculated as:

$$\text{Inflation Rate}_{2026} = \frac{CPI_{2026} - CPI_{2025}}{CPI_{2025}} \times 100$$

Q: Suppose the CPI in 2025 is 322.0 and in 2024 is 313.7. What is the inflation rate for 2025?

$$\frac{322.0 - 313.7}{313.7} \times 100 = 2.6\%$$

Q: If the nominal wage in 2026 is $20 per hour and the CPI is 250, what is the real wage (in base year dollars)?

$$\text{Real Wage} = \frac{20}{250} \times 100 = 8$$

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

$$\text{Real Interest Rate} = 8\% - 5\% = 3\%$$

Q: Which of the following formulas correctly converts a nominal variable to a real variable?

$$\text{Real Variable} = \frac{\text{Nominal Variable}}{\text{Price Index}} \times 100$$

Question 1

Which of the following best describes the Consumer Price Index (CPI)?

Accepted Answer

A measure of the average change over time in the prices paid by a typical urban family for a fixed market basket of goods and services.

Question 2

If the cost of the market basket in the base year is $$200 and in the current year is 250$$, what is the CPI for the current year?

Accepted Answer

$$CPI = \frac{250}{200} 	imes 100 = 125$$

Question 3

The inflation rate for 2026 is calculated as:

Accepted Answer

$$	ext{Inflation Rate}_{2026} = \frac{CPI_{2026} - CPI_{2025}}{CPI_{2025}} 	imes 100$$

Question 4

Suppose the CPI in 2025 is 322.0 and in 2024 is 313.7. What is the inflation rate for 2025?

Accepted Answer

$$\frac{322.0 - 313.7}{313.7} 	imes 100 = 2.6\%$$

Question 5

Which bias causes the CPI to overstate the cost of living and the inflation rate?

Accepted Answer

Substitution bias

Question 6

If the nominal wage in 2026 is $20 per hour and the CPI is 250, what is the real wage (in base year dollars)?

Accepted Answer

$$	ext{Real Wage} = \frac{20}{250} 	imes 100 = 8$$

Question 7

Which of the following is true about the GDP deflator?

Accepted Answer

It includes all final goods and services produced in the economy.

Question 8

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

Accepted Answer

$$	ext{Real Interest Rate} = 8\% - 5\% = 3\%$$

Question 9

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

Accepted Answer

Borrowers

Question 10

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 11

Which of the following is a problem caused by deflation?

Accepted Answer

It increases the burden on borrowers by increasing the real interest rate.

Question 12

If the cost of a Big Mac rises from $$4.50 to 9.00 $$due to inflation, what happens to nominal income if total output remains unchanged?

Accepted Answer

Nominal income also doubles.

Question 13

Which of the following best explains why the CPI may not accurately reflect the true cost of living?

Accepted Answer

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

Question 14

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

Accepted Answer

Lenders gain, borrowers lose.

Question 15

Which of the following formulas correctly converts a nominal variable to a real variable?

Accepted Answer

$$	ext{Real Variable} = \frac{	ext{Nominal Variable}}{	ext{Price Index}} 	imes 100$$

Question 16

Which of the following is NOT a problem caused by inflation?

Accepted Answer

Increase in real purchasing power for people on fixed incomes

Question 17

If the CPI in 1965 was 31.5 and in July 2026 is 333, by what percentage did the cost of the market basket increase?

Accepted Answer

$$\frac{333 - 31.5}{31.5} 	imes 100 \approx 958\%$$

Question 18

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

Accepted Answer

Personal Consumption Expenditures Price Index (PCE)

Question 19

Suppose you borrow $1,000 at a nominal interest rate of 5%. If the expected real interest rate is 2%, what rate of inflation would be most beneficial to you as a borrower?

Accepted Answer

Greater than 3%

Unemployment and Inflation: Measuring and Understanding Price Changes

Study Guide - Practice Questions

Study Guide - Flashcards