Question

 1.

 The index used to measure inflation is the

 a consumer price index.

 b. producer price index.

 c. wholesale price index.

 d. GDP deflator.

 2. 

The price index in year 2 is 110 and the price index in year 3 is 115. The rate

 of inflation between years 2 and 3 is

 a. 1.04%.

 b. 2.04%.

 c. 4.17%.

 d. 4.55%

 3.

 The situation that occurs when the inflation rate falls is called

 a. deflation

 b. disinflation

 c. stagflation

 d. inflation

 4.

 The situation that occurs when the price level falls is called

 a. deflation

 b. disinflation

 c. stagflation

 d. inflation

 5.

 The situation that occurs when the price level rises is called

 a. deflation

 b. disinflation

 c. stagflation

 d. inflation

 6.

 If the nominal rate of interest is 8% and the rate of inflation is 3%, the real

 rate of interest is

 a. 5%

 b. -5%

 c. 3%

 d.-3%

 7.

 The curve depicted in Figure 3.2 is called:

 a. the labor demand curve.

 b. the labor supply curve.

 c. Okun's rule of thumb

 d. the Phillips curve.

Answer 1

Ques 1. The index used to measure inflation is - Consumer Price Index. This is because this index contains information about the basket of goods and services demanded by the consumers at current and base year prices. As a result, inflation can be calculated using the following formula:

Inflation = [CPI (year 2) - CPI (year 1)] / CPI (year 1) x 100

Ans. (A)

Ques 2. Given, the price index in year 2 = 110 and price index in year 3 = 115

Using the above formula for inflation, we get:

= (115 - 110)/110 x 100 = 4.54%

Ans. (D)

Ques 3. The situation of falling inflation is called disinflation.

Ans. (B)

Ques 4. The situation of falling price level is called deflation.

Ans. (A)

Ques 5. The situation when price level rises is called inflation.

Ans. (D)

Ques 6. Given, nominal interest rate = 8% and Real rate of inflation = 3%

Thus, the real interest rate is given by the Fisher formula:

Real interest rate = Nominal interest rate - inflation

= 8 - 3 = 5%

Ans. (A)

Ques 7. Please provide figure 3.2