Ch6
Scenario 243Sue Holloway was an accountant in 1944 and earned $12,000 that year. Her son, Josh Holloway, is an accountant today and he earned $210,000 in 2008. The price index was 17.6 in 1944 and 184 in 2008. Refer to Scenario 243. Sue Holloway’s 1944 income in 2008 dollars is
Answer

a. 
$125,454.55. 

b. 
$1,996,800.00. 

c. 
$113,454.55. 

d. 
$1,147.83. 
Table 246. The table below applies to an economy with only two goods — hamburgers and hot dogs. The fixed basket consists of 4 hamburgers and 8 hot dogs.
Year 
Price of hamburgers 
Price of hot dogs 
2009 
$5.00 
$3.00 
2010 
5.50 
3.30 
2011 
5.61 
3.63 



Refer to Table 246. Between 2009 and 2011, the cost of living increased by
Answer

a. 
19 percent. 

b. 
17 percent. 

c. 
14 percent. 

d. 
6 percent. 
If the nominal interest rate is 5 percent and the rate of inflation is 9 percent, then the real interest rate is
Answer

a. 
14 percent. 

b. 
4 percent. 

c. 
4 percent. 

d. 
0.44 percent 
Suppose that over the past year, the real interest rate was 6 percent and the inflation rate was 4 percent. It follows that
Answer

a. 
the dollar value of savings increased at 10 percent, and the purchasing power of savings increased at 2 percent. 

b. 
the dollar value of savings increased at 6 percent, and the purchasing power of savings increased at 10 percent. 

c. 
the dollar value of savings increased at 6 percent, and the purchasing power of savings increased at 2 percent. 

d. 
the dollar value of savings increased at 10 percent, and the purchasing power of savings increased at 6 percent. 
If 2004 is the base year, then the inflation rate for 2005 equals
Answer

a. 
CPI in 2004 – CPI in 2005 CPI in 2005 x 100
b. CPI in 2004 – CPI in 2004 CPI in 2004 x 100
c.CPI in 2004 – CPI in 2005 CPI in 2004 x 100
d.CPI in 2005 – CPI in 2004 CPI in 2005 x 100










Table 246. The table below applies to an economy with only two goods — hamburgers and hot dogs. The fixed basket consists of 4 hamburgers and 8 hot dogs.
Year 
Price of hamburgers 
Price of hot dogs 
2009 
$5.00 
$3.00 
2010 
5.50 
3.30 
2011 
5.61 
3.63 



Refer to Table 246. If the base year is 2010, then the economy’s inflation rate in 2010 is
Answer

a. 
8 percent. 

b. 
11.11 percent. 

c. 
10.91 percent. 

d. 
10 percent. 
Suppose that over the past year, the real interest rate was 5 percent and the inflation rate was 3 percent. It follows that
Answer

a. 
the dollar value of savings increased at 5 percent, and the purchasing power of savings increased at 8 percent. 

b. 
the dollar value of savings increased at 5 percent, and the purchasing power of savings increased at 2 percent. 

c. 
the dollar value of savings increased at 8 percent, and the purchasing power of savings increased at 2 percent. 

d. 
the dollar value of savings increased at 8 percent, and the purchasing power of savings increased at 5 percent. 
Which of the following is correct?
Answer

a. 
Nominal and real interest rates always move in opposite directions. 

b. 
Nominal and real interest rates always move together. 

c. 
Nominal and real interest rates never move together. 

d. 
Nominal and real interest rates do not always move together. 
Suppose the price index was 105 in 2007, 115.5 in 2008, and the inflation rate was lower between 2008 and 2009 than it was between 2007 and 2008. This means that
Answer

a. 
the price index in 2009 was lower than 115.5. 

b. 
the price index in 2009 was lower than 126. 

c. 
the inflation rate between 2008 and 2009 was lower than 1.1 percent. 

d. 
the price index in 2009 was lower than 127.05. 
If the consumer price index was 100 in the base year and 107 in the following year, then the inflation rate was
Answer

a. 
10.7 percent. 

b. 
107 percent. 

c. 
1.07 percent. 

d. 
7 percent. 
Sophia puts money in the bank and earns a 5 percent nominal interest rate. If the inflation rate is 2 percent, then after one year,
Answer

a. 
Sophia will have 5 percent more money, which will purchase 3 percent more goods. 

b. 
Sophia will have 3 percent more money, which will purchase 7 percent more goods. 

c. 
Sophia will have 5 percent more money, which will purchase 7 percent more goods. 

d. 
Sophia will have 3 percent more money, which will purchase 5 percent more goods. 
A 2009 Chevrolet model has more horsepower than the 2008 version and is included in the BLS basket of goods. BLS attempts to account for this change in the market basket by
Answer

a. 
adjusting the price of the good to account for the quality change. 

b. 
adjusting the share of the market basket allocated to transportation. 

c. 
dropping the good from the basket. 

d. 
substituting in a different vehicle with the same horsepower as the 2008 model. 
For purposes of calculating the CPI, the housing category of consumer spending includes the cost of
Answer

a. 
shelter. 

b. 
fuel and other utilities. 

c. 
household furnishings and operation. 

d. 
All of the above are correct. 
Suppose lawn mowers are part of the market basket used to compute the CPI. Suppose also that the quality of lawn mowers deteriorates while the price of lawn mowers stays the same. If the Bureau of Labor Statistics is able to precisely adjust the CPI for the improvement in quality, then, other things equal,
Answer

a. 
the CPI will rise. 

b. 
the CPI will fall. 

c. 
lawn mowers will no longer be included in the market basket. 

d. 
the CPI will stay the same. 
For an imaginary economy, the consumer price index was 62.50 in 2004, 100.00 in 2005, and 160.00 in 2006. Which of the following statements is correct?
Answer

a. 
If the basket of goods that is used to calculate the CPI cost $80 in 2004, then that basket of goods cost $128 in 2005. 

b. 
If the basket of goods that is used to calculate the CPI cost $90 in 2005, then that basket of goods cost $150 in 2006. 

c. 
The overall level of prices increased by 97.5 percent between 2004 and 2006. 

d. 
All of the above are correct. 