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1. A fixedweight price index like the CPI ______ the change in the cost of living because
it ______ take into account that people can substitute less expensive goods for ones that
have become more expensive.
A) overestimates; does
B) overestimates; does not
C) underestimates; does not
D) accurately estimates; does
2. The new chainweighted measures of real GDP are an improvement over traditional
measures because the prices used to compute real GDP are:
A) always from the same base year.
B) chained to the CPI.
C) never far out of date.
D) imputed.
3. Suppose that GDP (
Y
) is 5,000. Consumption is given by the equation
C
= 500 + 0.5(
Y

T
). Investment (
I
) is given by the equation
I
= 2,000  100
r
, where
r
is the real interest
rate in percent. Government spending (
G
) is 1,000 and taxes (
T
) is also 1,000. When a
technological innovation changes the investment function to
I
= 3,000  100
r
:
A)
I
is unchanged and
r
rises by 10 percentage points.
B)
I
is unchanged and
r
rises by 15 percentage points.
C)
I
rises by 1,000 and
r
is unchanged.
D)
I
rises by 1,000 and
r
rises by 10 percentage points.
4. When factor supply is fixed and quantity of the factor is graphed on the horizontal axis
while factor price is graphed on the vertical axis, the factor:
5.
All
of the following are costs of fully expected inflation
except
that expected inflation:
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6.
All
of the following are a flow
except
:
7. Assume that apples cost $0.50 in 2002 and $1 in 2007, whereas oranges cost $1 in 2002
and $1.50 in 2007. If 4 apples were produced in 2002 and 5 in 2007, whereas 3 oranges
were produced in 2002 and 5 in 2007, then the GDP deflator in 2007, using a base year
of 2002, was approximately:
A) 1.9.
B) 1.5.
C) 2.0.
D) 1.7.
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 Spring '09
 Smith
 Macroeconomics, Inflation, Interest Rates

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