# Chapter 23 Flashcards

Terms Definitions
 An increase in the price of imported cameras is captured by the CPI but not by the GDP deflator. False An increase in the price of helicopters puchased by the U.S> military is captured by the CPI False Because an increase in gasoline prices causes consumers to ride their bikes more and drive their cars less, the CPI tends to underestimate the cost of living. False The "base yeart" in a price index is the benchmark year against which other years are compared. True If the CPI rises at 5 percent per year, then every individual in the country needs exactly a 5 percent increase in their income for their standard of living to remain constant True The producer price index (PPI) is constructed to measure athe change in price of total production. True If the Bureau of Labor Statistics fails to recognize that recently poduced automobiles can be driven for many more miles than older models, then the CPI tends to overestimate the cost of living. True If your wage rises from \$55 to \$6.25 while the CPI rises from 112 to 121, you should feel an increase in your standard of living True The largest category of goods and services in the CPI is medical care. False It is impossible for real interest rates to be negative. False If the nominal interestr rate is 12 percent and the rate of inflation is 7 percent, then the real reate of interest is 5 percent True If lenders demand a real rate of return of 4 percent and they expect infaltion to be 5 percent, then they should charge 9 percent intrest when they extend loans. True If borrowers and lenders agree on a nominal interest rate and inflation turns out to be greater than they had anticipated, lenders will gain at the expense of borrowers. False If workers and firms agree on an increase in wages based on their expectations of inflation and inflation turns out to be less than they expected, workers will gain at the expense of firms. True Inflation can be measured by all of the following except the... finished goods price index The CPI will be most influenced by a 10 percent increase in the price of which of the following consumption categories? Food and Beverages In 1989, the CPI was 124. In 1990, it was 130.7. What was the rate of inflation? 5.4 percent Which of the following would likely cause the CPI to rise more than the GDP deflator? an increase in the price of Hondas produced in Japan and sold in the United States The "basket" on which the CPI is based is composed of... products purchased by the typical consumer If there is an increase in the price of apples that causes consumers to puchase fewer pounds of apples and more pounds of oranges, the CPI will suffer from... substitution bias What is the value of the basket in the base year? (beef/pork) \$300 What are the values of the CPI in 2003, 2004, and 2005 respectively? (beef/pork) 100, 113.3, 125 What is the inflation rate for 2004? (beef/pork) 13.3 percent What is the inflation rate for 2005? (beef/pork) None of the above (25%) The table shows that the 2004 inflation rate is biased upward because of... (beef/pork) substitution bias Suppose the base year is changed in the table from 2003 to 2005. Also, suppose that the typical consumption basket was now determined in 2005 (now use the 2005 consumption basket) What is the new value of the CPI in 2004? 90.6 Suppose your income rises from \$19000 to \$31000 while the CPI rises from 122 to 169. Your standard of living has likely... risen If the nominal interest rate is 7 percent and the inflation rate is 3 percent, then the real intrest rate is... 4 Percent Which of the following statements is correct? The real interest rate is the nominal interest rate minus the inflation rate If inflation is 8 percent and the real interest rate is 3 percent, then the nominal interest rate should be... 11 percent Under which of the following conditions would you prefer to be the lender? The nominal rate of interest is 5 percent and the inflation rate is 1 percent Under which of the following conditkions would you prefer to be the borrower? The nominal rate of interest is 20 percent and the inflation rate is 25 percent If borrowers and lenders agree on a niminal interest rate and inflation turns out to be less than they had expected.. lenders will gain at the expense of borrowers If workers and firms agree on an increase in wages based on their expectations of inflation and inflation turns out to be more than they expected... firms will gain at the expense of workers
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