Chapter 23 — Quiz

Multiple choice

Q1. The CPI measures: a) The price of all goods in the economy b) The average price of a fixed basket of goods purchased by a typical urban consumer c) GDP d) The unemployment rate

Q2. Core CPI excludes: a) Housing and medical care b) Food and energy c) Government purchases d) Imports

Q3. Substitution bias causes the CPI to: a) Understate inflation b) Overstate inflation c) Be exactly correct d) Fluctuate randomly

Q4. If the CPI rises from 250 to 260, the inflation rate is approximately: a) 2% b) 4% c) 10% d) 260%

Q5. Real income is: a) Nominal income × the CPI b) Nominal income adjusted for inflation (divided by the price index) c) GDP per capita d) Income after taxes

Q6. Deflation is dangerous because: a) Things get cheaper b) The real burden of debt rises, consumers delay purchases, and the zero lower bound limits monetary policy c) It always leads to hyperinflation d) It reduces government spending

Q7. Central banks target 2% inflation rather than 0% because: a) 2% makes the government richer b) A small positive inflation provides a buffer against deflation c) 0% inflation is impossible d) Higher inflation is always better

Q8. The 2021–23 inflation was caused by: a) Supply-chain disruptions only b) Fiscal stimulus only c) A combination of supply disruptions and demand stimulus, with the interaction making both worse d) The Fed raising rates

Q9. Who benefits from unexpected inflation? a) Lenders with fixed-rate loans b) Borrowers with fixed-rate loans (their real debt burden falls) c) Retirees on fixed incomes d) Savers

Q10. Hyperinflation occurred in: a) The U.S. in the 1990s b) Weimar Germany, Zimbabwe, and Venezuela c) Japan in the 2000s d) China in the 2010s

Short answer

SA1. Name the three biases in CPI measurement and explain why each overstates inflation.

SA2. Why do central banks watch core inflation rather than headline?

SA3. Convert: a worker earned $30,000 in 1995 (CPI = 152). What is this in 2024 dollars (CPI = 315)?

SA4. What are two costs of inflation and two costs of deflation?

SA5. Why were low-income households hit hardest by the 2021–23 inflation?

True / False

TF1. Core CPI includes food and energy prices. (True / False)

TF2. The CPI tends to understate true inflation. (True / False)

TF3. Deflation increases the real burden of debt. (True / False)

TF4. Nominal income growth that matches inflation means real income is unchanged. (True / False)

TF5. The 2021–23 inflation episode peaked at about 15% YoY. (True / False)

Selected answers in appendices/answers-to-selected.md.