Scribd
Upload
2K views4 pages

CPI and Inflation Practice Problems - 1

This document provides practice problems related to calculating and understanding CPI, inflation rates, and real GDP. It includes a table to calculate market basket costs and CPI indexes for different years. It then calculates inflation rates between the years and provides the formulas. It also includes questions about how different groups are affected by inflation and formulas/concepts related to nominal vs. real interest rates and GDP.

Uploaded by

lixvanter
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
2K views4 pages

CPI and Inflation Practice Problems - 1

This document provides practice problems related to calculating and understanding CPI, inflation rates, and real GDP. It includes a table to calculate market basket costs and CPI indexes for different years. It then calculates inflation rates between the years and provides the formulas. It also includes questions about how different groups are affected by inflation and formulas/concepts related to nominal vs. real interest rates and GDP.

Uploaded by

lixvanter
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 4

CPI and Inflation Practice Problems #1

Fill in blanks in table below


Year 1 (2000) Year 2 (2003) Year 3 (2006)
Market Basket Items # of Units $ per unit Total Cost $ per unit Total Cost $ per unit Total Cost
Cheese 2 lbs $1.75 $3.50 $1.50 $ $1.50 $
Blue Jeans 2 pairs $12.00 $ $15.50 $ $20.00 $
Gasoline 10 gallons $1.25 $ $1.60 $ $2.70 $
Total Cost of Basket --------- ------ $ ------ $ ------- $

Using year 1 as our base year, using the formula above to calculate the index for each year:

Year 1 Index = (base year)

Year 2 Index =

Year 3 Index =

Calculate the inflation rate on a percentage basis for the following:


Hint: formula = [(Ending index – Beginning index) / Beginning Index] X 100

Year 1 to Year 2:

Year 1 to Year 3:

Year 2 to Year 3:
Use the table below for the following 2 questions
Year Nominal GDP GDP Deflator
Year 3 $5000 125
YEAR 4 $6,600 150

A. What is REAL GDP in Year 3?

B. What is REAL GDP in Year 4?


CPI & Inflation Practice Questions #1
1. Indicate whether each of the following groups is helped or hurt by inflation
A. Banks who extend many fixed rate loans _______________

B. Students who put savings in a fixed rate savings account _________________

C. Mechanics who pay for new tools with a fixed rate loan ________________

D. People who sign a four-year lease on an apartment ____________________

E. Homeowners who purchase a home and have a 30-year fixed rate mortgage ________________

F. Homeowners who purchase a home and have a 30-year adjustable rate mortgage _____________

2. An increase in the CPI from 200 to 225 would indicate an annual rate of measured inflation of
a. 1.3% b. 12.5% c. 25% d. 200% e. 225%

3. The price index for the current year is 180. This means that, on average, prices in the current year are
a. $0.80 higher than prices in the base year. b. $1.80 higher than prices in the base year.
c. 80 percent of prices in the base year. d. 180% higher than base year prices
e. 80% higher than base year prices

4. Inflation benefits people who


a. lend at fixed interest rates. b. receive fixed incomes.
c. save at fixed interest rates. d. borrow at fixed interest rates
e. borrow at variable interest rates

5. The real interest rate equals


a. the nominal interest rate plus the rate of expected inflation.
b. the nominal interest rate divided by the rate of expected inflation.
c. the rate of expected inflation minus the nominal interest rate.
d. the nominal interest rate minus the rate of unexpected inflation.
e. the nominal interest rate minus the rate of expected inflation

6. If prices rose by 3% and nominal output rose by 5%, real output:


a. Rose by 2%. b. Rose by 8%. c. Fell by 2% d. Fell by 8%

7. In 2000 the nominal rate of interest was 7 percent. The rate of inflation was 2.7 percent. The real rate of
interest was:
a. 9.7 percent. b. 7 percent. c. 4.3 percent d. 2.7 percent
CPI and Inflation Practice Problems #1 KEY

Year 1 (2000) Year 2 (2003) Year 3 (2006)


Market Basket Items # of Units $ per unit Total Cost $ per unit Total Cost $ per unit Total Cost
Cheese 2 lbs $1.75 $3.50 $1.50 $ 3.00 $1.50 $3.00
Blue Jeans 2 pairs $12.00 $ 24 $15.50 $ 31.00 $20.00 $40.00
Gasoline 10 gallons $1.25 $ 12.50 $1.60 $ 16.00 $2.70 $27.00
Total Cost of Basket --------- ------ $ 40.00 ------ $ 50.00 ------- $70.00

Using year 1 as our base year, using the formula above to calculate the index for each year:
Year 1 Index = (base year)
(40/40) x 100 = 100
Year 2 Index =
(50/40) x 100 = 125
Year 3 Index =
(70/40) x 100 = 175
Calculate the inflation rate on a percentage basis for the following:
Hint: formula = [(Ending index – Beginning index) / Beginning Index] X 100
Year 1 to Year 2:
(125-100)/100 = 25%
Year 1 to Year 3:
(175-100)/100 = 75%
Year 2 to Year 3:
(175-125)/105 = 40%

Use the table below for the following 2 questions

Year Nominal GDP GDP Deflator


Year 3 $5000 125
YEAR 4 $6,600 150

A. What is REAL GDP in Year 3?


125 = 5000/x solve for x…5000/125 = 40 X 100 = $4,000 real GDP in Year 3
B. What is REAL GDP in Year 4?

150 = 6600/x solve for x…6600/150 = 44 X 100 = $4,400 real GDP in Year 4
CPI & Inflation Practice Questions #1
1. Indicate whether each of the following groups is helped or hurt by inflation
A. Banks who extend many fixed rate loans HURT

B. Students who put savings in a fixed rate savings account HURT

C. Mechanics who pay for new tools with a fixed rate loan HELPED

D. People who sign a four-year lease on an apartment HELPED

E. Homeowners who purchase a home and have a 30-year fixed rate mortgage HELPED

F. Homeowners who purchase a home and have a 30-year adjustable rate mortgage HURT

2. An increase in the CPI from 200 to 225 would indicate an annual rate of measured inflation of
a. 1.3% b. 12.5% c. 25% d. 200% e. 225%

3. The price index for the current year is 180. This means that, on average, prices in the current year are
a. $0.80 higher than prices in the base year. b. $1.80 higher than prices in the base year.
c. 80 percent of prices in the base year. d. 180% higher than base year prices
e. 80% higher than base year prices

4. Inflation benefits people who


a. lend at fixed interest rates. b. receive fixed incomes.
c. save at fixed interest rates. d. borrow at fixed interest rates
e. borrow at variable interest rates

5. The real interest rate equals


a. the nominal interest rate plus the rate of expected inflation.
b. the nominal interest rate divided by the rate of expected inflation.
c. the rate of expected inflation minus the nominal interest rate.
d. the nominal interest rate minus the rate of unexpected inflation.
e. the nominal interest rate minus the rate of expected inflation

6. If prices rose by 3% and nominal output rose by 5%, real output:


a. Rose by 2%. b. Rose by 8%. c. Fell by 2% d. Fell by 8%

7. In 2000 the nominal rate of interest was 7 percent. The rate of inflation was 2.7 percent. The real rate of
interest was:
a. 9.7 percent. b. 7 percent. c. 4.3 percent d. 2.7 percent

You might also like