Chapter 6 Practice Problems

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

(Ans = 5%)

#2 A major difference between the CPI and GDP inflator is:

The GDP deflator reflects the prices of all final goods and services produced domestically, whereas the consumer price index reflects the prices of a market basket of goods and services bought by consumers.

#3 Describe 3 problems that make the consumer price index an imperfect measure of the cost of living.

1- substitution bias
2- introduction of new goods
3- unmeasured quality changes