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econ practice test

econ practice test - 1 Which of the following is FALSE...

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1. Which of the following is FALSE about the price index according to lecture and/or text? (1) A 10% increase in the price of chicken has a greater effect on the consumer price index than a 10% increase in the price of caviar because chicken is a bigger part of the average consumer's market basket. (2) CPI is used as a policy target, to index payments and to translate nominal value to real value. (3) The CPI is a perfect measure of the true cost of living. (4) The BLS does not change very often the composition of the basket that represents spending of the typical urban household. (5) Both the CPI and the GDP deflator are relevant measures of price changes. Using 2003 as the Base year, 2. Suppose On Monkey Island it is observed that the typical consumer market basket includes 5 corn cobs and 10 bags of black beans. In 2003, a typical consumer pays \$2 for a corn cob and \$4 for a bag of black beans. In 2004, a typical consumer pays \$4 for a corn cob and \$5 for a bag of black beans. Then we know that the market basket costs 50 in 2003 and it costs 70 in 2004. (4) \$50; \$70 (2003) 2x5=10 4x10=40 ==50 (2004) 4x5=20 5x10=70 3. The value for CPI in 2003 is 100 and the value for the CPI in 2004 is 140 . (4) 100; 140 50/50 x 100=100 70/50x100=140 4. If the Consumer Price Index (CPI) increased from 100 to 200 over the last decade and the nominal wage increased from \$125 to \$300, what was the change in the real wage? (2) +\$25 real wage = 125/100 =125 a decade ago (nominal rate/ cpi x 100) real wage today = 300/200x100=150 today 150-125= +25 5. People suffer from inflation because it reduces the purchasing power of money. This is a description of: (2) The inflation tax 6. Suppose OPEC succeeds in raising world oil prices by 300 percent. This price increase causes inventors to

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develop alternative fuels for internal-combustion engines. A hydrogen-powered engine is developed which is cheaper to operate than gasoline engines. Which problem in the construction of the CPI does this situation represent? (1) substitution bias and introduction of new goods 7. Juan owns a shoe repair shop in Bolivia. The value of the Bolivian peso dropped last year at a rate of 5% per day. One day you walk into the store to find Juan grumbling about the inflation rate as he erases a chalk board that reads, “today’s prices for shoe repairs.” Juan is most likely grumbling about: (4) The menu cost of inflation 8. In the country of Hyrkania, the CPI in 2005 was 110 and the CPI in 2006 was 121. Andy, a resident of Hyrkania, borrowed money in 2005 and repaid the loan in 2006. If the nominal interest rate on the loan was 10 percent, then the real interest rate was (3) 0 percent. inflation = 121-110/110 =10% real =nominal-inflation---> real = 10-10 = 0% 9. A German automobile company produces cars in the United States, with some of those cars being exported to other nations and some of them being sold within the United States. If the prices of these cars increase, then: (1) The GDP deflator and the CPI will both increase.
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econ practice test - 1 Which of the following is FALSE...

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