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Al and Amanda meet with Shino,the banker,to work out the details of a mortgage.They all expect that inflation will be 3 percent over the term of the loan,and they agree on a nominal interest rate of 7 percent.As it turns out,the inflation rate is 4 percent over the term of the loan. a.What was the expected real interest rate? b.What was the actual real interest rate? c.Who benefitted and who lost because of the unexpected inflation?

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a.The expected real interest rate was 4 ...

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Chip's Chocolate Factory has an agreement with its workers to completely index the wages of its employees to inflation in the CPI.Chip's currently pays its production line workers $20 an hour and is scheduled to index their wages today.If the CPI is currently about 120 and was 100 a year ago,by how much should Chip's increase the hourly wages of its workers?


A) $0.58
B) $0.65
C) $1.00
D) $4.00

E) B) and C)
F) A) and C)

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The price index is 260 in one year and 300 in the next.What is the inflation rate?


A) 1.0 percent
B) 9.3 percent
C) 12 percent
D) 15.3 percent

E) A) and D)
F) A) and B)

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Suppose that the real interest rate was 3 percent and the inflation rate was 1 percent.What happened with the value of savings?


A) The dollar value of savings increased at 2 percent,and the value of savings measured in goods increased at 3 percent.
B) The dollar value of savings increased at 1 percent,and the value of savings measured in goods increased at 2 percent.
C) The dollar value of savings increased at 3 percent,and the value of savings measured in goods increased at 1 percent.
D) The dollar value of savings increased at 4 percent,and the value of savings measured in goods increased at 3 percent.

E) A) and B)
F) All of the above

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If there is a reduction in the price of large tractors imported into Canada from Russia,what will happen to the GDP deflator and the consumer price index?


A) The GDP deflator and the consumer price index will decrease.
B) The GDP deflator will not change; the consumer price index will decrease.
C) The GDP deflator will decrease; the consumer price index will not change.
D) Neither the GDP deflator nor the consumer price index will change.

E) B) and D)
F) A) and D)

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What best defines the inflation rate?


A) the price level
B) the change in the price level
C) the price level divided by the price level in the previous period
D) the percentage change in the price level from the previous period

E) A) and C)
F) A) and D)

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Which of the following is NOT a widely acknowledged problem with the CPI as a measure of the cost of living?


A) substitution bias
B) introduction of new goods
C) unmeasured quality change
D) unmeasured wage changes

E) All of the above
F) A) and B)

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What are the categories of Canadian consumer spending,ranked from largest to smallest?


A) food,alcoholic beverages and tobacco products,shelter,transportation,and health and personal care
B) food,health and personal care,shelter,alcoholic beverages and tobacco products,and transportation
C) shelter,food,alcoholic beverages and tobacco products,transportation,and health and personal care
D) shelter,transportation,food,health and personal care,and alcoholic beverages and tobacco products

E) B) and C)
F) A) and B)

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Scenario 6-1 Grant Smith was a doctor.In 1944,he made $12,000.His daughter,Lisa Smith,is also a doctor.Last year she made $275,000.The price index in 1944 was 17.6 and the price index last year was 200. -Refer to the Scenario 6-1.What is Lisa's income in 1944 dollars?


A) $15,667
B) $17,401
C) $19,322
D) $24,200

E) All of the above
F) A) and D)

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Which price changes when an inflation rate is calculated using the CPI?


A) all prices
B) the prices of all final goods and services
C) the prices of all consumer goods
D) the prices of some consumer goods

E) None of the above
F) C) and D)

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Table 6-2 Table 6-2 -Refer to the Table 6-2.Suppose that the basket of goods in the CPI consisted of 3 units of pork and 4 units of corn.What is the consumer price index for 2015 if the base year is 2014? A) 120.00 B) 129.17 C) 136.11 D) 150.00 -Refer to the Table 6-2.Suppose that the basket of goods in the CPI consisted of 3 units of pork and 4 units of corn.What is the consumer price index for 2015 if the base year is 2014?


A) 120.00
B) 129.17
C) 136.11
D) 150.00

E) C) and D)
F) All of the above

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Table 6-2 Table 6-2 -Refer to the Table 6-2.Suppose that the basket of goods in the CPI consisted of 3 units of pork and 4 units of corn.What is the inflation rate for 2015? A) 21.33 percent B) 25.00 percent C) 29.17 percent D) 36.11 percent -Refer to the Table 6-2.Suppose that the basket of goods in the CPI consisted of 3 units of pork and 4 units of corn.What is the inflation rate for 2015?


A) 21.33 percent
B) 25.00 percent
C) 29.17 percent
D) 36.11 percent

E) None of the above
F) A) and D)

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Most,but not all,athletic apparel sold in Canada is imported from other nations.If the price of athletic apparel increases,what will happen to the GDP deflator?


A) It will increase less than the consumer price index will.
B) It will increase more than the consumer price index will.
C) It will not increase,but the consumer price index will increase.
D) It will increase,but the consumer price index will not increase.

E) A) and D)
F) B) and C)

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By not taking into account the possibility of consumer substitution,how is the CPI biased?


A) It understates the cost of living because people buy more of the newer goods.
B) It overstates the cost of living because people buy more of the cheaper goods.
C) It understates the cost of living because people have higher incomes and perceive some goods as inferior.
D) It overstates the cost of living because people have higher incomes and perceive formerly luxury goods as necessities.

E) B) and D)
F) B) and C)

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Table 6-3 In the country of Shem,the CPI is calculated using a market basket consisting of 5 apples,4 kg of chicken,3 shirts,and 2 litres of gasoline.The per-unit prices of these goods have been as follows: Table 6-3 In the country of Shem,the CPI is calculated using a market basket consisting of 5 apples,4 kg of chicken,3 shirts,and 2 litres of gasoline.The per-unit prices of these goods have been as follows: -Refer to the Table 6-3.What was the inflation rate,as measured by the CPI,between 2013 and 2014? A) 27.9 percent B) 34.1 percent C) 47.0 percent D) 48.5 percent -Refer to the Table 6-3.What was the inflation rate,as measured by the CPI,between 2013 and 2014?


A) 27.9 percent
B) 34.1 percent
C) 47.0 percent
D) 48.5 percent

E) A) and D)
F) All of the above

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Tiffany is offered a job in Winnipeg that pays $90,000.She is offered a similar job in Montreal for $60,000.Which set of CPIs comes closest to giving both salaries the same purchasing power?


A) 90 in Winnipeg and 120 in Montreal
B) 90 in Winnipeg and 40 in Montreal
C) 60 in Winnipeg and 120 in Montreal
D) 60 in Winnipeg and 40 in Montreal

E) A) and B)
F) B) and D)

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If the real interest rate is 9 percent and the expected inflation rate is 2 percent,what would a person expect to have after a year?


A) 7 percent more dollars,which will purchase 7 percent more goods
B) 7 percent more dollars,which will purchase 9 percent more goods
C) 11 percent more dollars,which will purchase 7 percent more goods
D) 11 percent more dollars,which will purchase 9 percent more goods

E) A) and B)
F) A) and C)

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Which of the following is the consumer price index used for?


A) to differentiate between gross national product and gross domestic product
B) to turn dollar figures into meaningful measures of purchasing power
C) to characterize the types of goods and services that consumers purchase
D) to measure the quantity of goods and services that the economy produces

E) None of the above
F) A) and B)

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Samantha deposits $2000 into a saving account that pays an annual interest rate of 5 percent.Over the course of a year,the inflation rate is 2 percent.What happens at the end of the year?


A) Samantha has $100 more in her account,and her purchasing power has increased by about $40.
B) Samantha has $100 more in her account,and her purchasing power has increased by about $60.
C) Samantha has $140 more in her account,and her purchasing power has increased about $100.
D) Samantha has $140 more in her account,and her purchasing power has increased about $40.

E) None of the above
F) B) and C)

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Samantha goes to the grocery store to make her monthly purchase of ginger ale.As she enters the soft drink section,she notices that the price of ginger ale has been raised by 15 percent,so she decides to buy some peppermint tea instead.Which problem in the construction of the CPI is this situation most relevant to?


A) substitution bias
B) introduction of new goods
C) unmeasured quality change
D) income effect

E) B) and D)
F) All of the above

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