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CPI and Exchange Rates

Description: This quiz covers the relationship between Consumer Price Index (CPI) and Exchange Rates.
Number of Questions: 15
Created by:
Tags: economics cpi exchange rates
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What is the primary purpose of the Consumer Price Index (CPI)?

  1. To measure the average price level of a basket of goods and services.

  2. To determine the inflation rate.

  3. To compare the cost of living between different countries.

  4. To calculate the value of a currency.

Show answer
Correct Option: A
Explanation:

The CPI is a measure of the average price level of a basket of goods and services purchased by households. It is used to calculate the inflation rate and to compare the cost of living between different countries.

How does the CPI affect exchange rates?

  1. A higher CPI leads to a stronger currency.

  2. A lower CPI leads to a weaker currency.

  3. The CPI has no effect on exchange rates.

  4. The CPI affects exchange rates only in the long run.

Show answer
Correct Option:
Explanation:

A higher CPI indicates that the cost of living is rising, which makes a country's goods and services more expensive for foreigners to purchase. This leads to a decrease in demand for the country's currency, causing it to weaken.

Which of the following factors can contribute to a higher CPI?

  1. An increase in the cost of raw materials.

  2. A decrease in the supply of goods and services.

  3. An increase in demand for goods and services.

  4. All of the above.

Show answer
Correct Option: D
Explanation:

A higher CPI can be caused by an increase in the cost of raw materials, a decrease in the supply of goods and services, or an increase in demand for goods and services.

How does a weaker currency affect exports and imports?

  1. It makes exports more expensive and imports cheaper.

  2. It makes exports cheaper and imports more expensive.

  3. It has no effect on exports and imports.

  4. It affects exports and imports only in the short run.

Show answer
Correct Option: B
Explanation:

A weaker currency makes a country's goods and services cheaper for foreigners to purchase, which leads to an increase in exports. Conversely, it makes imports more expensive for domestic consumers, which leads to a decrease in imports.

What is the relationship between CPI and inflation?

  1. CPI is a measure of inflation.

  2. Inflation is a measure of CPI.

  3. CPI and inflation are the same thing.

  4. CPI and inflation are not related.

Show answer
Correct Option: A
Explanation:

CPI is a measure of the average price level of a basket of goods and services. Inflation is the rate at which the CPI increases over time.

How does the central bank use CPI to control inflation?

  1. By raising interest rates.

  2. By lowering interest rates.

  3. By buying government bonds.

  4. By selling government bonds.

Show answer
Correct Option: A
Explanation:

The central bank can use CPI to control inflation by raising interest rates. This makes it more expensive for businesses and consumers to borrow money, which reduces demand for goods and services and helps to lower the CPI.

What is the relationship between CPI and purchasing power?

  1. A higher CPI leads to a higher purchasing power.

  2. A lower CPI leads to a higher purchasing power.

  3. CPI has no effect on purchasing power.

  4. CPI affects purchasing power only in the long run.

Show answer
Correct Option: B
Explanation:

A lower CPI indicates that the cost of living is decreasing, which means that consumers can purchase more goods and services with the same amount of money. This leads to a higher purchasing power.

How does a weaker currency affect a country's trade balance?

  1. It improves the trade balance.

  2. It worsens the trade balance.

  3. It has no effect on the trade balance.

  4. It affects the trade balance only in the short run.

Show answer
Correct Option: A
Explanation:

A weaker currency makes a country's exports cheaper and imports more expensive, which leads to an increase in exports and a decrease in imports. This results in a trade surplus, which improves the trade balance.

What is the relationship between CPI and real wages?

  1. A higher CPI leads to higher real wages.

  2. A lower CPI leads to higher real wages.

  3. CPI has no effect on real wages.

  4. CPI affects real wages only in the long run.

Show answer
Correct Option: B
Explanation:

A lower CPI indicates that the cost of living is decreasing, which means that workers can purchase more goods and services with the same amount of money. This leads to higher real wages.

How does a weaker currency affect a country's foreign exchange reserves?

  1. It increases foreign exchange reserves.

  2. It decreases foreign exchange reserves.

  3. It has no effect on foreign exchange reserves.

  4. It affects foreign exchange reserves only in the short run.

Show answer
Correct Option: A
Explanation:

A weaker currency makes a country's exports cheaper and imports more expensive, which leads to an increase in exports and a decrease in imports. This results in a trade surplus, which increases the country's foreign exchange reserves.

What is the relationship between CPI and the cost of living?

  1. A higher CPI leads to a higher cost of living.

  2. A lower CPI leads to a higher cost of living.

  3. CPI has no effect on the cost of living.

  4. CPI affects the cost of living only in the long run.

Show answer
Correct Option: A
Explanation:

A higher CPI indicates that the cost of living is rising, which means that consumers have to pay more for the same goods and services.

How does a weaker currency affect a country's economic growth?

  1. It promotes economic growth.

  2. It hinders economic growth.

  3. It has no effect on economic growth.

  4. It affects economic growth only in the short run.

Show answer
Correct Option: A
Explanation:

A weaker currency makes a country's exports cheaper and imports more expensive, which leads to an increase in exports and a decrease in imports. This results in a trade surplus, which increases the country's foreign exchange reserves and promotes economic growth.

What is the relationship between CPI and unemployment?

  1. A higher CPI leads to higher unemployment.

  2. A lower CPI leads to higher unemployment.

  3. CPI has no effect on unemployment.

  4. CPI affects unemployment only in the long run.

Show answer
Correct Option:
Explanation:

A higher CPI can lead to higher unemployment because it reduces the purchasing power of consumers, which can lead to a decrease in demand for goods and services. This can lead to businesses laying off workers, which increases unemployment.

How does a weaker currency affect a country's inflation rate?

  1. It increases the inflation rate.

  2. It decreases the inflation rate.

  3. It has no effect on the inflation rate.

  4. It affects the inflation rate only in the short run.

Show answer
Correct Option: A
Explanation:

A weaker currency makes imported goods and services more expensive, which can lead to an increase in the CPI. This can lead to higher inflation.

What is the relationship between CPI and interest rates?

  1. A higher CPI leads to higher interest rates.

  2. A lower CPI leads to higher interest rates.

  3. CPI has no effect on interest rates.

  4. CPI affects interest rates only in the long run.

Show answer
Correct Option:
Explanation:

A higher CPI can lead to higher interest rates because the central bank may raise interest rates in an attempt to control inflation.

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