1. Assume that there are only two goods: A and B
In the base year, Quantity Price
A 10 $1
B 10 $4
In the current year, Quantity Price
A 20 $ 5
B 25 $20
The Consumer Price Index (CPI) for the current year is:
d. 500
2. Which of the following groups is most hurt by unexpected inflation?
d. people with large retirement savings held in savings accounts
3. If the nominal interest rate is 5% and the inflation rate is 2%, the real interest rate is:
b. 3%
4. For which of the following reasons might inflation cause Real GDP to grow slower than it otherwise would?
d. Inflation decreases savings in financial form
5. Disposable Income is equal to:
d. National Income Minus Taxes Plus Transfers
6. Assume that Potential Real GDP equals $10,000. National Income is therefore $10,000. Of this, consumers will pay $2,000 in taxes, save $1,000, and spend $7,000 on consumer goods. Business Investment spending is $2000. In order to avoid recessions and inflation (to have equilibrium), the government should have a:
c. budget surplus of $1000
7. According to Keynes, when the Great Depression started, the government should have:
c. had a large increase in government spending
8. If the government lowers taxes by $10 billion, the Real GDP will rise by
a. more than $10 billion
9. Which of the following is an automatic stabilizer?
a. unemployment benefits
10. “Crowding out” means that
c. a government budget deficit raises interest rates and causes investment spending to fall