multiple choice 4. By not taking into account the possibility of consumer substi
ID: 1103993 • Letter: M
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multiple choice
4. By not taking into account the possibility of consumer substitution, the CPT a. understates the cost of living. b. overstates the cost of living. c. may overstate or understate the cost of living, depending on how quickly prices rise. d. may overstate or understate the cost of living, regardless of how quickly prices rise. 5. When the quality of a good improves while its price remains the same, the purchasing power of the money a. increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for creases, so the CPI understates the change in the cost of living if the quality change is not accounted for b. in decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted for c. decreases, so the CPl understates the change in the cost of living if the quality change is not accounted for. d. he consumer price index was 200 in 2014 and 210 in 2015. The nominal interest rate during What was the real interest rate during this period? this period was 6.5 percent. a. 1.5 percent b. 1.75 percent c. 11.25 percent d. 11.5 percent 7. Which of the following is correct? Although levels of real GDP per person vary substantially from country to country, the growth rate of real GDP per person is similar across countries. a. b. Productivity is not closely linked to government policies. c. The level of real GDP per person is a good gauge of economic prosperity, and the growth rate of real GDP per person is a good gauge of economic progress. d. Productivity may be measured by the growth rate of real GDP per person. 8. An increase in the saving rate would, other things the same, increase growth more for a poor country than for a rich country, and raise growth a. b. increase growth more for a poor country than for a rich country, but raise growth c. increase growth more for a rich country than for a poor country, and raise growth d. increase growth more for a rich country than for a poor country, but raise growth 9. What would happen in the market for loanable funds if the government were to increase the tax permanently temporarily permanently temporarily on interest income? a. Interest rates would rise. b. Interest rates would be unaffected.Explanation / Answer
4.
The correct answer is C.
CPI is fixed-weight price index. When price of a product increases, there is a tendency of the consumer to substitute it by lower priced alternative. Now this behavior is not accurately captured by the CPI as the price of lower priced alternatives would have a lower weight in the index, ultimately overstating inflation or cost of living.
Also, CPI bases measurements assuming that consumers make their purchases at the end of period rather than the beginning, thus, understating the inflation. So, even if consumers make purchases of lower priced products at the end of period, it would get more weight in the index.
5. The correct answer is c.
Consider an example: CPI will overstate the inflation if a new car or TV model which has a superior quality compared to the older model is more expensive than the previous version.
6. The correct answer is a.
Inflation = [210-200/200] = 5%. Nominal ineterst rate = 6.5%. Real interest rate = nominal interest rate - inflation. => 6.5%-5% = 1.5%
7. The correct answer is c.
Choice a. would not be correct as growth rate can't be similar across countries, since different countries use different currencies, are in indifferent stages of develpoment, have different populations, etc.
Choice b. is incorrect as the productivity is closely ties to government policies.
Choice d. is incorrect as productivity would be better measured by gdp/working hours.
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