Part -1:

1. The CPI is a measure of the overall cost of the goods and services bought by

a. a typical firm.
b. the government.
c. a typical consumer.
d. All of the above are correct.

2. Suppose a basket of goods and services has been selected to calculate the CPI and 2002 has been selected as the base year. In 2002, the basket's cost was $50; in 2004, the basket's cost was $52; and in 2006, the basket's cost was $54.60. The value of the CPI in 2004 was

a. 96.2.
b. 102.0.
c. 104.0.
d. 152.0.

3. For an imaginary economy, the value of the consumer price index was 138.75 in 2007, and the inflation rate was 11 percent between 2006 and 2007. The :Consumer tiricatdex in 2006 was

a. 125.

b. 127.75.
c. 149.75.
d. 154.01.

4. In 1931, President Herbert Hoover was paid a salary of $75,000. Government statistics show a consumer price index of 15.2 for 1931 and 214.5 for 2009. President Hoover's 1931 salary was equivalent to a 2009 salary of about

a. $5,507.
b $1,058,388.
c. $1,140,000.
d. $15,525,000.

5. The introduction of a new good

a. increases the cost of maintaining the same level of economic well-being.

b. decreases the cost of maintaining the same level of economic well-being.

c. has no impact on the cost of maintaining the same level of economic well-being.

d. may increase or decrease the cost of maintaining the same level of economic well-being, depending on how expensive the new good is.

6. Arlo is offered a job in Des Moines, where the CPI is 80, and a job in New York, where the CP1 is 125.

Arles job offer in Des Moines is for $42,000. How much does the New York job have to pay in order for the two salaries to represent the same purchasing power?
a. $42,000
b. $65,625
c. $68,880
d. $189,000

7. Samantha goes to the grocery store to make her monthly purchase of ginger ale. As she enters the soft drink section, she notices that the price of ginger ale has increased 15 percent, so she decides to buy some ppermint tea instead. To which problem in the construction of the CPI is this situation most relevant?

a substitution bias

b. introduction of new goods
c. unmeasured quality change
d. income effect

8. The real interest rate tells you

a. how fast the number of dollars in your bank account rises over time.

b. how fast the purchasing power of your bank account rises over time.
c. the number of dollars in your bank account today.
d. the purchasing power of your bank account today.

9. If the nominal interest rate is 6 percent and the rate of inflation is 4 percent, then the real interest rate is a. -4 percent.
a. 2 percent.

b.4 percent.

c. 8 percent.

d.  4 percent.

10. If one wants to know how the material well-being of the average person has changed over time in a given country, one should look at the

a. level of real GDP.
b. growth rate of nominal GDP.
c. growth rate of real GDP.
d. growth rate of real GDP per person.

11. Last year real GDP in the imaginary nation of Oceania was 561.0 billion and the population was 2.2 million. The year before, real GDP was 500.0 billion and the population was 2.0 million. What was the growth rate of GDP per person during the year?

a. 2 percent
b. 12 percent
c. 10 percent
d. 4 percent

12. Each day Sonja works 8 hours and produces 8 units of goods and services. Emma works 10 hours each day and produces 9 units of goods and services. It follows that
a. Sonja's income per day will be higher than Emma's.
b. Emma's productivity is higher than Sonja's.
c.Sonja's productivity is higher than Emma's.
d.Emma's income per hour will be higher than Sonja's.
13. The equipment and structures available to produce goods and services are called
a. technology.
b. the production function.
c. physical capital.
d. human capital.

Part -2:

1. CPI/Inflation calculation:

Suppose the US economy makes only apples and pears. Data from 2009, 2010 and 2011 are shown below.

Calculate the CPI with 2010 as the base year. Use a basket basket in 2010 if there are 100 people)

What is the inflatioTh-M/Mn 2010 to 2011 using the CPI with 2012?

Using the data from 2011 and 2012. explain why inflation as increase in the cost of living.

How much money would you need in 2010 to have the same purchasing power as $100 has in 2012?

2. Mortgages and interest rates:

Suppose that you borrowed money at a fixed rate of 5% ov r rift-Years to purchase a house.
• If the rate of inflation is 1%, what is the real interest rate of the loan?
• If the rate of inflation is 4%, what is tretriFiiiieralt rate of the loan? What if the rate was 10%?
• Which one of the inflation rates is best for you in terms of the loan repayments? Why?
• Which one of the inflation rates is best for the bank? Why?

3. Briefly describe a policy that a developing (poor) country can implement for itself (without the help from another country) that would help future growth. Which components of the model we discussed in Chapter 7 would be affected? Explain how they would be affected.

Describe something that a developed (already 'rich') country can do to help a developing country improve their future growth. Which components of the model we discussed in Chapter 7 would be affected? Explain how they would be affected.

4. Consider Oceania and Eurasia, two countries identical in every sense except for the amount of physical capital. (That is, Eurasia's population, level of human capital, level of technology and amount of each natural resource is equal to that of Oceania). At this particular time, the amount of physical capital that Eurasia has is double that of Oceania. According to the model in the "Productivity and Growth" chapter of your text:

• Which country's productivity is higher? Why?
• Which country's GDP is higher? Why?
• Suppose a foreign (to both countries) builds one factory in Eurasia and one factory in Oceania. The factories are identical to each other.

Will the change in Oceania's GDP be larger, smaller or the same as the change in Eurasia's GDP? Why?