Im Quiz 4

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  • Topic: Inflation, Nominal interest rate, Interest rate
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Practice Multiple Choice Tests for Chapter 4
Answers and feedbacks are at the end of this file.

1. You got a job in year 2008 with a salary of $25,000. In 2009, you receive a $2000 increase in your salary. CPI for 2009 (with base year at year 2008) is 108. The percentage increase in your real income is: a. 2%

b. 3%
c. Zero
d. 1%

2. The annual inflation rate in an economy dropped from 10% two years ago to 2% last year. Which of the following apply? a. prices of consumer goods dropped by 2% last year, ii) prices of consumer goods uniformly rose at 2% last year, iii) prices of some consumer goods rose by more than 2% and prices for some may have even fallen b. prices of consumer goods uniformly rose at 2% last year c. prices of some consumer goods rose by more than 2% and prices for some may have even fallen

3. [INCOME.1] The CPI in 2008 is 120, while the same measure in 2009 stands at 148. You, a part-time paralegal, earned $ 8,500 a year in 2008, and $ 12,300 a year in 2009. Your real income in 2008, and in 2009 is: a. $7000 and $8300

b. $7803.33 and $8310.81
c. $7083.33 and $8310.81
d. $ 7038 and 8030.31

4. [INCOME.2] Consider question 3 above. The percentage change in your real income between 2008 and 2009 is: a. 17.33%
b. 16.55%
c. 18.57%

5. [CPI.1] The rate of inflation in the CPI in year 2008 for an economy is 4.17%. The CPI for years 2008 and 2009 for this economy are, respectively, 125 and 133. The inflation rate in the CPI for year 2009 is __. a. 6.4%

b. 4.6%
c. 5.6%
d. 4.5%

6. [CPI.2] Consider question 5 above. The nominal interest rates between 2008 and 2009 a. have risen
b. have fallen
c. have stayed the same

7. A high and unexpected inflation
a. renders the lenders and borrowers both losers
b. renders the borrower a winner and the lender a loser
c. leaves workers worse off and employers better off
d. all of the above
e. both b. and c.

8. A low and stable rate of inflation
a. also leads to an “anticipated” rate of inflation b. creates many distortions in the economy
c. leaves businesses unprofitable
d. creates disputes between workers and employers

9. A high and unexpected rate of inflation
a. leads to a misallocation of resources since some prices rise very fast and others fall b. leads to a misallocation of resources since, for producers, the relative price changes can not be distinguished from the general rise in prices c. creates a “noise” in the income distribution system

d. all of the above
e. Both b. and c.

10. A high inflation rate
a. may be quite stable, yet it will be unexpected
b. is usually more volatile then a low rate of inflation
c. is usually unpredictable
d. both b. and c.

11. A high rate of inflation
a. Helps the economy with sustained long term economic growth as investment increases due to potential for increased profits b. Hurts economy’s long term growth prospects since investment will be lowered due to potential for increased profits c. Hurts economy’s long term growth prospects since investment will be lowered due to increased uncertainly d. Both b. and c.

12. A high rate of inflation
a. leads to misallocation of resources in the economy
b. creates a “game” by which some people experience unintended losses or gains c. lowers investment and hurts the level of economic growth
d. leads to more strikes, labor disputes and the like
e. all of the above
f. a., b., and c. above

13. A high and unexpected inflation affects the efficiency of allocation between goods we produce this year and those we produce next year because a. Fewer investment projects will be undertaken in an environment of high inflation b. More investment projects will be undertaken in an environment of high inflation c. Many more investment projects will be undertaken due to increased profitability in the future d. Both b. and c.

Questions 14-16 pertain to the following...
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