Multiple-Choice Review Questions

1. If the price of olives imported into the United States decreases, then the GDP deflator will ____ and the CPI will _____.
(A) decrease; decrease
(B) decrease; remain unchanged
(C) remain unchanged; decrease
(D) remain unchanged; remain unchanged
(E) decrease; increase

2. If the CPI goes to 150 from 120, then prices
(A) increased 20 percent.
(B) increased 25 percent.
(C) decreased 30 percent.
(D) increased 30 percent.
(E) increased 150 percent.

3. According to experts, the CPI
(A) overstates increases in the cost of living.
(B) understates increases in the cost of living.
(C) accurately estimates changes in the cost of living.
(D) could over- or underestimate changes depending on the season.
(E) should be abandoned in favor of the GDP deflator.

4. When products improve in quality the CPI will
(A) automatically increase.
(B) automatically decrease.
(C) become negative.
(D) overestimate the inflation rate.
(E) underestimate the inflation rate.

5. If the price of imported industrial robots increases, then the CPI will ___ and the GDP deflator will ___.
(A) increase; increase
(B) not be affected; not be affected
(C) increase; not be affected
(D) not be affected; increase
(E) increase; decrease

6. If nominal GDP equals $5,000 and real GDP equals $4,000, then the GDP deflator equals
(A) 0.8.
(B) 1.25.
(C) 125.
(D) 300.
(E) 800.

7. If nominal GDP equals $6,000 and the GDP deflator equals 200, what does real GDP equal?
(A) $30
(B) $1,200
(C) $3,000
(D) $12,000
(E) $1,200,000

8. Which of the following is NOT a major cost of inflation?
(A) Resources will be misallocated.
(B) Wealth will be redistributed.
(C) Savings will be discouraged.
(D) Real incomes will fall.
(E) Financial wealth will be eroded.

9. The term “menu costs” refers to
(A) fewer choices due to inflation.
(B) financial assets being worth less due to inflation.
(C) “à la carte” savings falling.
(D) food prices rising due to inflation.
(E) resource misallocation due to inflation.

10. Given the information in the table, what is the unemployment rate in Ecoville?
(A) 5 percent
(B) 10 percent
(C) 20 percent
(D) 30 percent
(E) 50 percent

11. Rising prices are a problem because
(A) money in household savings accounts can now buy fewer goods and services.
(B) household incomes generally do not rise with prices.
(C) the economy could run out of money.
(D) borrowers have to repay loans with more dollars.
(E) households are encouraged to save more.

12. Fisher’s Hypothesis states that
(A) the real interest rate equals the nominal interest rate plus the inflation rate.
(B) the nominal interest rate equals the real interest rate minus the inflation rate.
(C) the nominal interest rate equals the unemployment rate plus the real interest rate.
(D) the nominal interest rate equals the unemployment rate minus the real interest rate.
(E) the nominal interest rate equals the real interest rate plus the inflation rate.

13. Sue loses her job at a shoe factory when the economy falls into a recession. Sue is
(A) frictionally unemployed.
(B) cyclically unemployed.
(C) seasonally unemployed.
(D) structurally unemployed.
(E) a discouraged worker.

14. There is a strong demand for welders in California but Bill, an unemployed welder, lives in New York. Bill is
(A) frictionally unemployed.
(B) cyclically unemployed.
(C) structurally unemployed.
(D) considered to be a hidden worker.
(E)not counted in the ranks of the unemployed.

15. It is unlikely that the unemployment rate will ever fall to zero because of
(A) frictional unemployment.
(B) cyclical unemployment.
(C) government policies.
(D) corporate policies.
(E) the aged and infirm in our population.

Free-Response Review Questions

Inflation exerts significant costs on the economy. Specifically, explain how inflation
1. causes a misallocation of resources.
2. discourages savings.
3. redistributes wealth from lenders to borrowers.