1.
CPI inflation overstates increases in the cost of living
A.
but its impact on government budget is insignificant as both taxes and expenditures are tied to the index.
B.
because the index is subject to substitution bias but not quality bias.
C.
because the index is subject to quality bias but not substitution bias.
D.
by 1% per year, or perhaps even higher.
2.
The CPI is calculated as
A.
The current cost of a fixed market basket of producer goods divided by prices of the same goods in a base year multiplied by 100.
B.
The prices of a changing market basket of consumer goods divided by prices of similar goods in a base year multiplied by 100.
C.
The current cost of the basket of consumer items divided by the cost of the same basket of items in the reference base period multiplied by 100.
D.
Nominal GDP divided by real GDP multiplied by 100.
E.
The prices of all goods that are part of GDP divided by prices of the same goods in a base year multiplied by 100.
3..Which of the following is a reason why CPI inflation may overstate true inflation?
A.
The CPI measures quantities of goods, not prices of goods, and thus does not measure inflation accurately.
B.
The CPI does not include the prices of intermediate goods and raw materials.
C.
The CPI does not account for substitution away from relatively more expensive goods to relatively cheaper goods.
D.
The CPI includes imported goods, which are not relevant to domestic inflation.
4.
The nominal interest rate is
▼
.
the rate at which the puchasing power of an asset increases over time
the rate at which the dollar value of an asset is expected to increase over time
the rate at which the dollar value of an asset increases over time
the rate at which the purchasing power of an asset is expected to increase over time
5.
The real interest rate is
▼
the rate at which the puchasing power of an asset increases over time
the rate at which the dollar value of an asset is expected to increase over time
the rate at which the dollar value of an asset increases over time
the rate at which the purchasing power of an asset is expected to increase over time
.
The most important interest rate concept for the decisions made by borrowers and lenders is__________rate.
6.
The components of total spending are
A.
consumption, imports, investment, and the money supply.
B.
consumption, investment, government spending, and net exports.
C.
investment, intermediate goods, and factors of production.
D.
consumption, investment, exports, and imports.
7. Why are imports subtracted when GDP is calculated in the expenditure approach?
A.
They are not part of consumption in the domestic economy.
B.
They are produced abroad, and GDP only counts domestic production.
C.
They are valued in currencies other than the domestic currency.
D.
They do not go through formal markets and thus cannot be counted in GDP.
1) The correct answer will be "C". Indexes are substitution bias because they do not account for the cheaper substitute of the goods which the people buy in case of price rise.
2) The correct answer is "A". CPI always used a fixed basket of goods and they compare the current price with the base price of those goods.
3) The correct answer is "C". CPI doesn't account for the substitution effect.
4) The correct answer is "C". The nominal rate is where the dollar value of an asset increase over time. its purchasing power remains the same.
5) Correct answer is "A"
6) The components of total spending are consumption, investment, Government spending, and net exports. The correct answer is "B".
7) The correct answer is "B". They are manufactured abroad.
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