QUESTIONS FOR REVIEW

1 Which do ‘you think has a greater effect on ~e consumer price index: a 10 percent increase in the price of chicken or a 10 percent increase in the price of caviar? Why?

2. Describe the three problems that make the consumer price index an imperfect measure of the cost of living.

3. If the price of a Navy submarine rises, is the consumer price index or the GDP deflator affected more .Why?

4. Over a long period of time, the price of a candy bar rose from $0.10 to $0.60. Over the same period, the consumer price index rose from 150 to 300. Adjusted for overall inflation, how much did the price of the candy bar change.

5. Explain the meaning of nominal interest rate and real interest rate. How are they related?