Question

1.If you employer gives you a raise that is equal to the inflation rate, then your real salary will have increased T/F

2.If your bank pays you an interest rate of 6% and the inflation rate is 2% then your real rate of return is 8% T/F

3.The purchasing power of the $20 bill increases over time due to inflation T/F

4.The consumer price index for the year 2010 will always be calculated as (the cost of the basket of goods in the year 2010/the cost of the basket of goods in 2009)*100 T/F

5.The inflation rate measures the percentage change in the price index T/F

6.The average person spends about 42% of their income on housing T/F

7.If the average wage paid to the worker $20 in the year 1990 and $30 in year 2000, then the average worker in the year 2000 must have been better off in terms of purchasing power T/F

Answer 1

1. If the amount of salary increases while price level remains constant, a person will be able to purchase more goods and services. If the price level increases along with an increase in salary the purchasing power of salary will remain constant. Then a person will not be benefitted from the increased salary. For example a worker’s salary is $100 dollar per day and the price level is $10, then he can buy a bundle of 10 goods at a price of $10. But when the salary increase to $110 and price level increases to $11 the person is able to purchase the same amount 10 units of goods at an increased price of $11. Here the real salary remains constant.

Answer: False

2. Real return is the Rate of interest minus inflation rate. The bank pays 6% interest rate and inflation rate is 2%, then real return is 6%-2%= 4%.

Answer: False

3. The purchasing power of money decrease with inflation and increase with deflation. When inflation mounts up, the people can purchase less goods and services with their given income.

Answer: False.

4. CPI= current year cost of basket/base year cost of basket ×100.

A base year is usually selected for comparison while preparing CPI. Here 2009 is the base year. Thus CPI for the year 2010= cost of basket in 2010/cost of basket in 2009×100.

Answer: True.

5. CPI measures the percentage change in inflation rate. To find the inflation rate, minus the previous year CPI from the current year CPI and divide it with previous year CPI and multiply with 100. CPI for the year 2- CPI for the year 1/CPI for the year 1 ×100.

6. Most of the Americans spend between 33 and 37% of their income on housing.

Answer: False.

7. The benefit of increase in wage depends upon the rate of inflation. The increase in average wage does not merely infer that the workers are better off in 2000.

Answer: False.