The substitution by consumers of one good for another because of relative price changes is:
A. captured by the CPI and causes the CPI to underestimate the cost-of-living changes.
B. captured by the CPI and causes the CPI to overestimate the cost-of-living changes.
C. not captured by the CPI and causes the CPI to underestimate the cost-of-living changes.
D. not captured by the CPI and causes the CPI to overestimate the cost-of-living changes.
Answer: D
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Why is the nominal interest rate the opportunity cost of holding money?
What will be an ideal response?
When analyzing the complete model, which can predict short-run and long-run changes in the exchange rate, one must:
a. start with short-run changes and move toward long-run changes, and thereby determine expectations. b. use only the long-run model because the short-run model is largely irrelevant. c. start with the long-run equilibrium positions where expectations of future exchange rates can be determined, and use those expectations to feed into the short-run model. d. use the short-run model only, because the long run is only a theoretical concept.
If the demand for a product decreases by 16 percent, the supply elasticity is 1.2, and demand elasticity is 0.80, then the equilibrium price will decrease by 6 percent.
Answer the following statement true (T) or false (F)
Why might an equation that has always predicted accurately in the past prove to be wrong following a policy change?
a. Because the policy may change people's behavior and invalidate the equation. b. Because people's expectations may cease to be rational. c. Because uncertainty means that every equation contains some degree of error. d. Because the policy change may affect economic variables not contained in the equation.