Deck 24: Measuring the Cost of Living

Question 1

The Bureau of Labor Statistics determines which prices are most important to the typical consumer by surveying consumers.

Answer 1

True

Question 2

By keeping the basket of goods and services the same when computing the CPI, the Bureau of Labor Statistics isolates the effects of price changes from the effect of any quantity changes that might be occurring at the same time.

Answer 2

True

Question 3

Because the consumer price index reflects the goods and services bought by consumers better than the GDP deflator does, it is the more common gauge of inflation.

Answer 3

True

Question 4

The Bureau of Labor Statistics is part of the U.S. Department of Labor.

Question 5

If the value of the consumer price index is 110 in 2005 and 121 in 2006, then the inflation rate is 11 percent for 2006.

Question 6

If the current year CPI is 90, then the price level has decreased 10 percent since the base year.

Question 7

The CPI is a measure of the overall cost of the goods and services bought by a typical consumer.

Question 8

The CPI for 2008 is computed by dividing the price of the basket of goods and services in 2008 by the price of the basket of goods and services in the base year, then multiplying by 100.

Question 9

The inflation rate reported in the news is usually calculated from the GDP deflator rather than the consumer price index.

Question 10

Inflation can be measured using either the GDP deflator or the consumer price index.

Question 11

The consumer price index is used to monitor changes in an economy's production of goods and services over time.

Question 12

When the consumer price index falls, the typical family has to spend fewer dollars to maintain the same standard of living.

Question 13

Each week, the Bureau of Labor Statistics computes and reports the consumer price index.

Question 14

When the consumer price index is computed, the base year is always the first year among the years being considered.

Question 15

The content of the basket of goods and services used to compute the CPI changes every month.

Question 16

The CPI is always 1 in the base year.

Question 17

Economists use the term inflation to describe a situation in which the economy's overall price level is rising.

Question 18

The inflation rate is the absolute change in the price level from the previous period.

Question 19

If the current year CPI is 140, then the price level has increased 40 percent since the base year.

Question 20

The inflation rate for 2007 is computed by dividing (the CPI in 2007 minus the CPI in 2006) by the CPI in 2006, then multiplying by 100.

Question 21

There is no longer much debate among economists concerning the severity of and the solution to the problems in using the CPI to measure the cost of living.

Question 22

Data from the Bureau of Labor Statistics show that consumer spending on transportation is only slightly higher than consumer spending on food and beverages.

Question 23

When the price of Italian wine rises, this change is reflected in the U.S. CPI but not in the U.S. GDP deflator.

Question 24

The Bureau of Labor Statistics does not try to account for quality changes in the goods and services in the basket used to compute the CPI.

Question 25

Data from the Bureau of Labor Statistics show that consumer spending on medical care is about equal to consumer spending on housing.

Question 26

The group of goods and services used to compute the GDP deflator changes automatically over time, but the group of goods and services used to compute the CPI does not.

Question 27

Changes in the consumer price index are useful in predicting changes in the producer price index.

Question 28

The producer price index measures the cost of a basket of goods and services bought by firms rather than consumers.

Question 29

In the U.S., when the price of oil rises, the CPI rises by much more than does the GDP deflator.

Question 30

If the quality of a good deteriorates from one year to the next while its price remains the same, then the value of a dollar falls.

Question 31

Substitution bias causes the CPI to understate the increase in the cost of living from one year to the next.

Question 32

The CPI and GDP deflator usually tell two different stories about how quickly prices are rising.

Question 33

Many economists believe the bias in the CPI is now only about half as large as it once was.

Question 34

Data from the Bureau of Labor Statistics show that the largest category of consumer spending is housing.

Question 35

When a new good is introduced, consumers have more variety from which to choose, and this in turn increases the cost of maintaining the same level of economic well-being.

Question 36

Data from the Bureau of Labor Statistics show that apparel makes up 14 percent of the typical consumer's budget.

Question 37

The goal of the consumer price index is to gauge how much incomes must rise to maintain a constant standard of living.

Question 38

Substitution bias occurs because the CPI ignores the possibility of consumer substitution toward goods that have become relatively less expensive.

Question 39

When the price of nuclear missiles rises, this change is reflected in the CPI but not in the GDP deflator.

Question 40

The CPI does not reflect the increase in the value of the dollar that arises from the introduction of new goods.

Question 41

Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Bob withdraws his $105. If inflation was 2 percent during the year the money was deposited, then Bob's purchasing power has increased by 3 percent.

Question 42

Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Bob withdraws his $105. If inflation was 7 percent during the year the money was deposited, then Bob's purchasing power has increased by 2 percent.

Question 43

Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Bob withdraws his $105. If inflation was 5 percent during the year the money was deposited, then Bob's purchasing power has not changed.

Question 44

The U.S. income tax system is completely indexed for inflation.

Question 45

Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Bob withdraws his $105. If deflation was 7 percent during the year the money was deposited, then Bob's purchasing power has increased by 12 percent.

Question 46

If you currently make $25,000 a year and the CPI rises from 110 today to 150 in five years, then you need to be making $43,333.33 in five years to have kept pace with consumer price inflation.

Question 47

When consumer spending is broken down into the major categories of goods and services, the largest single category is spending on transportation.

Question 48

If the consumer price index is 120 in 2009 and 139.2 in 2010, then the rate of inflation for 2010 is 39.2 percent.

Question 49

Consumer price index =
× 100.

Question 50

The GDP deflator reflects the prices of all goods and services produced around the world, whereas the consumer price index reflects the prices of all goods and services bought by consumers.

Question 51

Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Bob withdraws his $105. If deflation was 5 percent during the year the money was deposited, then Bob's purchasing power has not changed.

Question 52

A COLA automatically raises the wage when the CPI rises.

Question 53

A dollar figure from 1908 is converted into 2008 dollars by dividing the 2008 price level by the 1908 price level, then multiplying by the 1908 dollar figure.

Question 54

Consumer price index =
× 100.

Question 55

Henry Ford paid his workers $5 a day in 1914, when the CPI was 10. Today, with the price index at 177, the $5 a day is worth $88.50.

Question 56

The largest sector in the consumer price index market basket is food and beverage purchases.

Question 57

When some dollar amount is automatically corrected for inflation by law or contract, the amount is said to be indexed for inflation.

Question 58

The purpose of measuring the overall level of prices in the economy is to permit comparison between dollar figures from different times.

Question 59

If the CPI today is 120 and the CPI five years ago was 80, then something that cost $1 five years ago would cost $1.50 in today's prices.

Question 60

The Bureau of Labor Statistics surveys consumers to determine a fixed basket of goods.

Question 61

Kristine has a savings account at a bank. If the nominal interest rate she earns exceeds the rate of inflation, then her purchasing power increases over time.

Question 62

The real interest rate measures the change in dollar amounts.

Question 63

Persistent increases in the overall level of prices have been the norm.

Question 64

If the nominal interest rate is 5 percent and the real interest rate is 2 percent, then the inflation rate is 3 percent.

Question 65

It is possible to observe a positive nominal interest rate together with a negative real interest rate.

Question 66

If the nominal interest rate is 5 percent and the inflation rate is 2 percent, then the real interest rate is 7 percent.

Question 67

In a period of inflation real interest rates will be greater than nominal interest rates.

Question 68

Price indexes allow comparisons of dollar figures over time and provide us a sense of how the economy is changing.

Question 69

The real interest rate is the interest rate corrected for inflation.

Question 70

In the late 1970s, U.S. nominal interest rates were high and real interest rates were low, but in the late 1990s, U.S. nominal interest rates were low and real interest rates were high.

Question 71

If the nominal interest rates rises, then the inflation rate must have increased.

Question 72

​The PPI is a price index that measures the cost to consumers of a typical basket of goods sold by firms.

Question 73

If the real interest rate is 5 percent and the inflation rate is 2 percent, then the nominal interest rate is 7 percent.

Question 74

The U.S. economy has never experienced deflation.

Question 75

The value of the consumer price index increased from 140 to 147 during 2006. Nathan opened a bank account at the beginning of 2006, and at the end of 2006 his account balance was $12,840. The purchasing power of Nathan's account increased by 2 percent during the year. We can conclude that Nathan opened his account with a deposit of $11,500 at the beginning of 2006.

Question 76

Archie has a savings account at a bank. If he earns 6 percent interest on his account and if there is deflation, then his purchasing power rises by more than 6 percent over the course of a year.

Question 77

The nominal interest rate tells you how fast the number of dollars in your bank account rises over time.

Question 78

In comparison to the situation in the late 1970s, the United States experienced lower nominal interest rates and higher real interest rates in the late 1990s.

Question 79

The real interest rate tells you how fast the purchasing power of your bank account rises over time.

Question 80

Core CPI is a price index that only looks at the prices of food and energy and ignores the prices of all other goods and services.