Inflation questions: 1 Suppose a typical consumer buys the following quantities of three commodities in 2006 and 2007. 2006 per 2007 per Commodity Quantity Unit price Unit price Food 10 units $6.00 $5.00 Clothing 4 units $7.00 $9.00 Shelter 6 units $12.00 $19.00 Which of the following can be concluded about the consumer price index (CPI) for this individual from 2006 to 2007? A. It remained unchanged B. It decreased by 25% C. It decreased by 20% D. It increased by 20% E. It increased by 25% Build the cost of the market basket for both 93 and 94. Then do your math.

Inflation questions: 2 Real Gross Nominal Gross Period Domestic Product Domestic Product Year 1 $100 billion $70 billion Year 2 $120 billion $120 billion Year 3 $130 billion $150 billion Which of the following can be concluded from the data above? 
 (A) The base year for the price index was year 1. (B) The base year for the price index was year 3. (C) The economy was producing higher-quality 
goods and services in years 2 and 3 than in 
year 1.
 (D) The economy was experiencing inflation 
during years 2 and 3.
 (E) The economy was experiencing deflation 
during years 1, 2, and 3.

Inflation questions: 3 The consumer price index (CPI) is designed to measure changes in the 
 (A) spending patterns of urban consumers only (B) spending patterns of all consumers
 (C) wholesale price of manufactured goods
 (D) prices of all goods and services produced in 
an economy
 (E) cost of a select market basket of goods and 
services

Inflation questions: 4 Inflation occurs when there is a sustained increase in which of the following? 
 (A) Real gross domestic product (B) The average price level
 (C) The price of any commodity (D) Labor productivity 
 (E) The unemployment rate

Inflation questions: 5 The consumer price index (CPI) is criticized for 
 (A) overstating the true burden of inflation because it does not recognize consumers’ ability to substitute goods and services as prices change 
 (B) overstating the true burden of inflation because it recognizes consumers’ ability to substitute goods and services as prices change (C) understating the true burden of inflation because it does not recognize consumers’ ability to substitute goods and services as prices change (D) understating the true burden of inflation because it recognizes consumers’ ability to substitute goods and services as prices change 
 (E) over stating the true burden of inflation because it reflects the prices of both intermediate goods and final goods

Inflation questions: 6 Assume that the nominal interest rate is 10 percent. If the expected inflation rate is 5 percent, the real interest rate is (A) 0.5% (B) 2% (C) Between 3.5% and 4.2% (D) 5% (E) 10%

Inflation questions: 7 If in a given year nominal gross domestic product grew by 12 percent and real gross domestic product grew by 5 percent, inflation for this year would be: A. –7% B. 7% C. 8% D. 11% E. 15%

Inflation Hurt/Helped ? 8 Which of the following groups would most likely gain from unanticipated inflation? (A) Landlords who own apartments in cities with rent controls (B) Individuals who have fixed retirement incomes (C) Individuals who earn high incomes (D) Individuals who have borrowed money at fixed interest rates (E) Banks that have loaned all excess reserves at a fixed interest rate

Inflation Hurt/Helped ? 9 Which of the following statements is true of unanticipated inflation? (A) It decreases the economic well-being of all members of society proportionately.
 (B) It decreases the economic well-being of all members of society equally.
 (C) It increases the economic well-being of net creditors.
 (D) It increases the economic well-being of net debtors.
 (E) It increases the economic well-being of workers with long-term labor contracts.

Inflation Hurt/Helped ? 10 Public policy that generates an unexpected increase in consumer prices will inflict short-run costs on all of the following EXCEPT (A) borrowers (B) workers with fixed incomes (C) savers holding non-interest-bearing money (D) taxpayers shifted into higher tax brackets (E) people whose incomes are not adjusted for inflation

Answers 1 - 10 1. (e) 25%. Multiple the quantities by one years prices and sum, then the second year’s prices sum and find % difference with the first year as the base. 2. (d) When Real = Nominal you are in the base year. 3. (e) CPI uses a fixed market basket. The GDP deflator uses all the goods and services produced that year. 4. (b) Inflation is an weighted* average of price changes. 5. (a) CPI doesn’t recognize substitution. 6. (d) nominal - inflation = real 7. (b) nominal - inflation = real 8. (d) borrowers helped as inflation boosts their incomes and reduces burden of fixed loan payments. 9. (d) same as 8 10. (a) same as 8 and 9. *Weighted: if you buy 2 of something you count it twice, if you buy five of another you count it 5 times. A weight of 2 and a weight of 5. For the CPI, food price changes get counted at a weight of .15 and 15% of a typical household’s income goes for food. Housing at .41.