Question 1

As long as an investor does not sell an asset,there is no capital gain or loss involved.

Accepted Answer

Even if an investor does not sell an asset, there can still be capital gain or loss involved due to fluctuations in the asset's value over time. This is known as unrealized gain or loss. Only when the investor sells the asset, the capital gain or loss becomes realized.

Question 2

Because both the Laspeyres and Paasche indices are weighted aggregate price indices,they will yield the same value for a given evaluation period.

Accepted Answer

The Laspeyres and Paasche indices may yield different values for a given evaluation period due to differences in their weighting schemes. The Laspeyres index uses a fixed base-period quantity weighting scheme, while the Paasche index uses a current-period quantity weighting scheme. This can result in differences in the weighting of goods and services included in the index and hence affect the resulting index value.

Question 3

The weighted aggregate price index assigns a lower weight to the items that are sold in higher quantities.

Accepted Answer

The weighted aggregate price index assigns higher weights to items that are sold in higher quantities, reflecting their greater importance or share in the market or economy.

Question 4

The Laspeyres price index uses the quantities evaluated in the base period to compute the weighted aggregate price index.

Accepted Answer

The Laspeyres price index uses the quantities of goods and services consumed in the base period as weights to calculate the aggregate price index in the current period. Therefore, the statement is true.

Question 5

The consumer price index (CPI)and the producer price index (PPI)must always move in sync with each other.

Accepted Answer

The CPI and PPI may move in the same direction at times, but they are not always synchronized. The CPI measures the average change in prices of goods and services purchased by consumers, while the PPI measures the average change in prices received by producers for their goods and services. The factors affecting these two indexes can differ, such as changes in supply and demand, production costs, and government policies. Additionally, the weights assigned to different products and industries in each index can also vary. Therefore, it is possible for the CPI and PPI to move in different directions or at different rates.

Question 6

The Laspeyres and Paasche indices tend to differ when the length of time between the periods increases since the relative quantities of items adjust to the changes in consumer demand over time.

Accepted Answer

The Laspeyres and Paasche indices are affected by changes in consumer demand over time, which causes the relative quantities of items to adjust between periods. As the length of time between the periods increases, these changes become more pronounced, causing the Laspeyres and Paasche indices to differ.

Question 7

The aggregate price index is used to represent relative price movements for a group of items.

Accepted Answer

The aggregate price index is a measure of the average price level of a given basket of goods and services over time, and is used to show changes in the relative prices of these items.

Question 8

The income component is _________ for stocks,interest for bonds,and rental income for a real estate investments.

Accepted Answer

The answer of The income component is _________ for stocks,interest...

Question 9

Rates of return expressed in nominal terms do not represent a true picture because they are not adjusted for inflation.

Accepted Answer

Nominal rates of return do not take into account inflation, therefore they do not provide an accurate reflection of the real value of the investment. Adjusting for inflation by using real rates of return is necessary to get a true picture of the investment's performance.

Question 10

The ______ equation is a theoretical relationship between nominal returns,real returns,and the expected inflation rate.

Accepted Answer

The answer of The ______ equation is a theoretical relationship...

Question 11

An unweighted price index for different types of properties will unfairly treat all property prices equally.

Accepted Answer

An unweighted price index does not take into account the varying importance or prevalence of different types of properties. For example, a price increase in luxury homes would contribute the same amount to the index as a price increase in affordable housing, despite the fact that the former may have a much smaller market share. This can lead to an inaccurate portrayal of overall price trends.

Question 12

Price indices are used to remove the effect of inflation so that business and economic time series can be evaluated in a more meaningful way.

Accepted Answer

Price indices measure changes in the price level of goods and services over time, allowing for the comparison of data across different periods. By adjusting for the effects of inflation, economists and businesses can more accurately analyze trends in the economy, such as changes in consumer spending, production levels, and investment patterns.

Question 13

The ___________ component is the capital gain or loss resulting from an increase or decrease in the value of the asset.

Accepted Answer

The answer of The ___________ component is the capital gain...

Question 14

The only possible income from an investment is the direct cash payment from the underlying asset.

Accepted Answer

This statement is false. Some investments may also yield income through capital appreciation, dividends, interest, or rental income.

Question 15

When the expected inflation rate is relatively low,a reasonable __________ to the Fisher equation is r = R - i.

Accepted Answer

The answer of When the expected inflation rate is relatively...

Question 16

If the year 2000 is used as a base year and the value of the price index in 2001 is 105,it implies that there was a 5% increase in the price level in 2001.

Accepted Answer

A price index starting at 100 in the base year (2000 in this case) and increasing to 105 in the next year (2001) implies a 5% increase in the price level.

Question 17

Index numbers provide direct comparisons of prices not only with respect to the base year,but also between non-base years.

Accepted Answer

The answer of Index numbers provide direct comparisons of prices...

Question 18

If the nominal rate of return is positive,then the real rate of return must also be positive.

Accepted Answer

The real rate of return can be negative if the inflation rate is higher than the nominal rate of return.

Question 19

An index number is an easy-to-interpret numerical value that reflects a _________ change in price quantity from a base price.

Accepted Answer

The answer of An index number is an easy-to-interpret numerical...

Question 20

There is no need to have a constant base value for a price index.

Accepted Answer

A constant base value is essential for a price index to measure relative changes in price levels or cost of living over time accurately, providing a consistent point of comparison.

Quiz 19: Returns, Index Numbers and Inflation