Deck 8: The Price Level and Inflation

Question 1

Inflation occurs when

A) all prices in the economy rise.
B) the prices of some goods rise and prices of some goods fall, but more goods have price increases than decreases.
C) the prices of some goods rise and prices of some goods fall, but fewer goods have price increases than decreases.
D) the overall level of prices rises.
E) all prices in the economy fall.

Answer 1

D

Question 2

Refer to the following figure when answering the next questions:

Based on the figure, and if we define inflation as being "under control" at rates less than 10 percent, when was inflation under control?

A) 1996-2002 only
B) 1997-2003 and 2005-2011
C) 2005-2011 only
D) 1996-1997 only
E) It was never under control.

Answer 2

B

Question 3

What is the consumer price index CPI)?

A) The CPI is the measure of consumer prices in both rural and urban areas. It is calculated by adding up all prices.
B) The CPI is a measure of the price level based on the consumption patterns of a typical consumer.
C) The CPI is a measure of all prices in the economy.
D) The CPI is a measure of food prices, because food is what is consumed.
E) The CPI is a measure of food, clothing, and housing prices.

Answer 3

B

Question 4

Refer to the following figure when answering the next questions:

Based on the figure, which of the following statements best applies?

A) During most years depicted, Brazil experienced hyperinflation.
B) During some years depicted, Brazil experienced inflation; in other years, Brazil experienced deflation.
C) Typically, Brazil experienced moderate inflation, with a couple years of high inflation.
D) During the period shown, Brazil experienced mostly very high inflation, with a few exceptions.
E) During the period shown, Brazil experienced inflation, but it remained mostly low, with a few exceptional years of moderate inflation.

Question 5

Refer to the following figure when answering the next questions:

In the figure, which of the following changes in the consumer price index CPI) of Brazil would most closely reflect what is depicted during the 2003-2004 time period?

A) January 2003: 100; July 2003: 118; July 2004: 120
B) January 2003: 100; July 2003: 108; July 2004: 118
C) January 2003: 100; July 2003: 118; July 2004: 200
D) January 2003: 100; July 2003: 110; July 2004: 112
E) January 2003: 100; July 2003: 116; July 2004: 106

Question 6

Typically the consumer price index CPI) is calculated by checking the prices of

A) all goods in 38 geographic locations.
B) only consumer goods in all populated places in the United States using the Census Bureau's definition of a populated place).
C) about 8,000 goods in about 38 locations across the United States.
D) about 8,000 goods in about 38 locations in North America.
E) about 10,000 goods in about 75 locations in the United States.

Question 7

The agency that measures the consumer price index CPI) in the United States is the

A) Bureau of Economic Analysis.
B) Bureau of Labor Statistics.
C) Economic Adjustment Agency.
D) Department of Commerce Price Index Office.
E) Department of Vital Statistics.

Question 8

Refer to the following figure when answering the next questions:

According to the figure, deflation was occurring

A) between 2003 and 2004.
B) from 1996 until 1999.
C) from 1996 through 1999 and between 2003 and 2004.
D) in none of the years shown.
E) in all of the years shown.

Question 9

Typically, the largest percentage category in the consumer price index CPI) is

A) transportation.
B) education.
C) food and beverages.
D) housing.
E) medical care.

Question 10

If the consumer price index CPI) was 100 in the period of 1982-1984, then

A) there would be deflation.
B) this period was the base period.
C) this period was characterized by menu costs.
D) this period was economically optimal.
E) this period was inflationary.

Question 11

If the price of a typical market basket of goods increased from about $20 in 1960 to $200 in early 2012, then it

A) must not have contained the same goods in both periods.
B) rose at a 100 percent rate from 1960 until early 2012.
C) rose at a 10 percent rate per year from 1960 until early 2012.
D) rose by 10-fold from 1960 until early 2012.
E) rose by 40-fold from 1960 until early 2012.

Question 12

Deflation is best described as when

A) all prices in the economy fall.
B) the prices of some goods rise and prices of some goods fall, but more goods have price increases than decreases.
C) the prices of some goods rise and prices of some goods fall, but fewer goods have price increases than decreases.
D) the overall level of prices of goods falls.
E) the overall level of prices of goods rises.

Question 13

The Bureau of Labor Statistics releases consumer price index CPI) data

A) hourly.
B) daily.
C) weekly.
D) monthly.
E) only when the typical basket of goods changes.

Question 14

Inflation necessarily occurs when

A) the price of gasoline rises.
B) a greater number of goods increase in price compared to the number of goods that undergo a price decrease.
C) the overall price level, such as the consumer price index CPI), rises.
D) there is an increase in the rate of change in the price level.
E) the price of at least one good, but possibly more than one good, in the economy increases.

Question 15

Refer to the following figure when answering the next questions:

Referring to the figure, we can observe that

A) inflation seemed to stabilize in the years 2000-2002, but it then spiked between 2002 and 2004.
B) inflation was always under control in every year shown.
C) there was a relatively constant increase in inflation throughout the entire period shown.
D) inflation tended to fall consistently throughout the entire period shown.
E) there were periods of inflation and deflation depicted in the chart.

Question 16

The value of the consumer price index CPI) in 2011 was 229 compared to the base period's, which will always have the value of

A) 1.
B) 50.
C) 100.
D) 150
E) 229.

Question 17

Deflation

A) automatically implies that, on average, everyone is better off because prices have fallen.
B) would negatively affect producers but positively affect consumers because producers must accept lower prices.
C) might easily make both producers and consumers better off because consumers might lose jobs due to falling prices and profit margins, and the falling profit margins would negatively impact producers.
D) might make you better off if your nominal wages fall more rapidly than prices.
E) automatically occurs when there are more goods with falling prices than there are goods with increasing prices.

Question 18

From 1960 until 2012, the long-run average rate of inflation in the United States was

A) less than 1 percent.
B) about 4 percent.
C) about 8 percent.
D) about 12 percent.
E) negative.

Question 19

Education typically composes about ______of the consumer price index( CPI).

A) 3 percent
B) 5 percent
C) 10 percent
D) 15 percent
E) 20 percent

Question 20

Inflation in Zimbabwe in 2008

A) was very low.
B) did not exist; during 2008 Zimbabwe had deflation.
C) was about the same as its neighbors, somewhere around 20 percent.
D) was very high at the beginning of the year but fell when Robert Mugabe agreed to share power with Morgan Tsvangarai.
E) reached the rate of 80 billion percent per month.

Question 21

Based on the weight of the consumer price index CPI), the price of rental housing increases by 15 percent and that of owned housing by 5 percent. During the same year, the price of gasoline falls by 22 percent. We can say that

A) the CPI would definitely fall during the year in question.
B) the CPI would definitely rise during the year in question.
C) all other factors being constant, it is likely the CPI would rise during the year in question.
D) all other factors being constant, it is likely the CPI would fall during the year in question.
E) all other factors being constant, the CPI would change by about 6 percent because that is the average housing change plus the average gasoline change.

Question 22

What is the difference between the consumer price index CPI) and the gross domestic product GDP) deflator?

A) Under normal circumstances, the CPI is the better measure of the overall price level.
B) If inflation is high, the CPI is the better measure of the overall price level; if inflation is low or deflation is occurring, the GDP deflator is the better measure.
C) The GDP deflator is used only during periods of deflation; the rest of the time we use the CPI to measure the overall price level.
D) If we want to examine how price changes affect the overall economy, the GDP deflator is the better measure.
E) The CPI must be equal to the GDP deflator because of the "equation of consumer homogeneity."

Question 23

The value of the consumer price index CPI) is best described as the

A) current year prices to base year prices, holding the market basket content constant.
B) current year prices to base year prices, including changes in the content of the market basket.
C) base year prices to current year prices, holding the market basket content constant.
D) base year prices to current year prices, including changes in the content of the market basket.
E) current year quantity to base year quantity, including changes in the prices of the market basket.

Question 24

If 51 percent of all goods in the consumer price index CPI) became more expensive and 49 percent became cheaper

A) inflation would certainly occur.
B) deflation would most likely occur.
C) inflation or deflation could occur, depending on the weight of these goods in the basket of goods and the actual percentage changes.
D) deflation would certainly occur if the price of housing was one of the goods that fell.
E) inflation would occur if the goods whose prices increased did so by the same percentage as the goods whose prices decreased.

Question 25

In Felixania, cat food constitutes 45 percent of the typical basket of goods for a typical consumer, dog food constitutes 3 percent, and all other goods constitute the remaining 52 percent. Assume the price of cat food rises by 4 percent, the price of dog food falls by 10 percent, and prices remain constant for all other goods. Based on the information given, we can definitely say

A) because the price of dog food fell by more than the price of cat food rose, the consumer price index CPI) must have decreased.
B) the consumer price index CPI) in Felixania is more than in the previous year.
C) if consumers get a 4 percent pay raise, they are worse off in terms of their real income compared to inflation as measured by the Felixanian consumer price index CPI).
D) because cat food is a luxury as is dog food), consumers are certainly no worse off in terms of their real wages as measured by the Felixanian consumer price index CPI).
E) menu costs have decreased.

Question 26

In Bovania, cattle compose 48 percent of the consumer price index CPI), housing composes 32 percent, and entertainment accounts for the remaining 20 percent. If, in a certain year, the price of cattle rises by 30 percent and the price of housing rises by 25 percent, then

A) the value of the CPI must rise, no matter what happens to the price of entertainment, because two-thirds of the CPI is more expensive.
B) the CPI has increased, as long as the price of entertainment does not fall by more than 55 percent.
C) the CPI has increased, even if the entertainment in the next year is free.
D) the CPI has decreased if the price of entertainment falls by more than 27.5 percent.
E) it is not possible to tell what would happen to the CPI because it is certain that the goods included in the CPI must change.

Question 27

Suppose a basket of goods and services has been selected to calculate the consumer price index CPI) and 2002 has been chosen as the base year. In 2002, the basket's cost was $76.00; in 2004, the basket's cost was $79.50; and in 2006, the basket's cost was $85.00. The value of the CPI was

A) 100 in 2002.
B) 108 in 2004.
C) 120 in 2006.
D) at least 118 in 2007.
E) no more than 90 in 2001.

Question 28

Your entertainment price index EPI) was computed based on three goods: movie tickets, popcorn, and limeade. If you change the quantity of these goods from this year to next year and the prices of two of the three goods increase while the other price falls, then your EPI

A) would definitely fall during the year in question if, and only if, you buy less of all the goods in question.
B) would definitely rise during the year in question because two of the three goods became more expensive.
C) might rise or fall, contingent on both the quantity of the goods that you bought and the prices of these goods.
D) might rise or fall, contingent only on the quantity of the goods that you bought and regardless of the prices of these goods.
E) might rise or fall, contingent only on the percentage of the market basket that these goods constituted and the percentage that each good occupied within the basket, regardless of the quantity change from year to year.

Question 29

According to the consumer price index CPI), in a particular year, the price of gasoline rises in the United States by 22 percent; simultaneously, the price of all food items falls by 8 percent. Which statement is correct?

A) If gasoline prices rise in more of the 38 geographical locations than those in which it stays the same or falls, the food price changes are irrelevant.
B) This means that the price of gasoline must have increased in more of the 38 geographical locations where the CPI is measured and food prices must have fallen in more of those 38 locations.
C) Based solely on the information given, we cannot conclude what happened to the CPI.
D) This means that the price of gasoline and food rose in every geographic location where the CPI is measured.
E) This means that the price of gasoline and food rose in every place where gasoline and food were sold in the United States during that year.

Question 30

If the price of industrial plastic injection molding machines rose by 20 percent and the price of oranges fell by 20 percent, then

A) the consumer price index CPI) would remain unchanged.
B) the consumer price index CPI) would rise if oranges had a greater weight.
C) the consumer price index CPI) would rise because plastic injection molding machines weigh more physically per unit.
D) the consumer price index CPI) would fall because people buy more oranges than plastic injection molding machines.
E) all else equal, the consumer price index CPI) would fall by the weighted value of oranges in the CPI, but because industrial plastic injection molding machines are not a consumer good, they would not affect the CPI.

Question 31

Chicken becomes more expensive in 2008 at Wegmans in State College, Pennsylvania. This means

A) the consumer price index CPI) will rise in 2008 if, and only if, State College is one of the 38 geographic locations and chickens are one of the 8,000 goods included in the CPI.
B) the consumer price index CPI) will almost certainly rise in 2008, even if State College is not included, as long as chicken is included and becomes more expensive on average at the indexed locations.
C) the consumer price index CPI) will likely fall if the average weighted price of chicken increases in the United States and the price of chicken at Wegmans makes almost no difference in the CPI.
D) the consumer price index CPI) might rise or fall and the price of chicken at Wegmans could make a very small difference in the CPI if chicken at Wegmans is included in the index. However, chicken would be a relatively small portion of the entire CPI, if it is included at all.
E) chicken prices are never included in the consumer price index CPI) because the creator of the CPI, James Gapinski, did not like chickens.

Question 32

Tofu becomes more expensive in 2008 at Safeway/Vons in Laguna Nigel, California. This means

A) the consumer price index CPI) will rise in 2008 if, and only if, Laguna Nigel is one of the considered 38 geographic locations and tofu is one of the 8,000 goods included in the CPI.
B) the consumer price index CPI) will almost certainly rise in 2008, even if Laguna Nigel is not included in the index, as long as tofu is included and becomes more expensive on average at the other locations.
C) the consumer price index CPI) will likely fall in 2008) if the average weighted price of tofu increases in the United States and the price of tofu at Safeway/Vons makes almost no difference in the CPI.
D) the consumer price index CPI) might rise or fall in 2008) and the price of tofu at Safeway/Vons could make a very small difference in the CPI if tofu at Safeway/Vons is included in the index. But because tofu is a relatively large portion of the entire CPI, it is most likely the CPI will rise.
E) tofu, even if included in the consumer price index CPI) in 2008, would make a small difference on the average weighted price of food and beverages. Food and beverages only constitute a small portion of the CPI, and hence, this would be unlikely to affect the overall CPI by any significant amount.

Question 33

Medical care typically composes ______of the typical consumer price index (CPI).

A) 5 percent
B) 8 percent
C) 10 percent
D) 12 percent
E) 15 percent

Question 34

In Felixania, cat food constitutes 45 percent of the typical basket of goods for a typical consumer, dog food constitutes 3 percent, and all other goods constitute the remaining 52 percent. Assume the price of cat food rises by 4 percent, the price of dog food falls by 10 percent, and the prices for all other goods remain constant. Based on the information given, we can definitely say

A) because all consumers are the same, all consumers must be worse off as a result of the change.
B) because the goods included in the consumer price index CPI) necessarily change from year to year, we can't determine the value of the new CPI.
C) if consumers get a 4 percent pay raise, they are worse off in terms of their real income compared to inflation as measured by the Felixanian consumer price index CPI).
D) if consumers get a 4 percent pay raise, they are better off in terms of their real income compared to inflation as measured by the Felixanian consumer price index CPI).
E) menu costs have decreased.

Question 35

Suppose a basket of goods and services has been selected to calculate the consumer price index CPI) and 2002 has been selected as the base year. In 2002, the basket's cost was $600; in 2004, the basket's cost was $650; and in 2006, the basket's cost was $700. The value of the CPI in 2004 was rounded to one decimal place)

A) 92.3.
B) 106.3.
C) 108.3.
D) 152.0.
E) more than 155.0.

Question 36

Oranges become more expensive in 2008 at Ukrop's in Charlottesville, Virginia. This means

A) the consumer price index CPI) will rise in 2008 if, and only if, Charlottesville is one of the 38 indexed geographic locations and oranges are one of the 8,000 goods included in the CPI.
B) the consumer price index CPI) will almost certainly rise in 2008, even if Charlottesville is not included, as long as oranges are included and become more expensive on average at the other indexed locations.
C) the consumer price index CPI) will likely fall if the average weighted price of oranges increases in the United States and the price of oranges at Ukrop's makes almost no difference in the CPI.
D) the consumer price index CPI) might rise or fall and the price of oranges at Ukrop's could make a very small difference in the CPI if oranges at Ukrop's are included. However, oranges would be a relatively small portion of the entire CPI, if they are included in it at all.
E) orange prices are never included in the consumer price index CPI) because the creator of the CPI, Milton Marquis, did not like oranges.

Question 37

If everyone buys the same goods every year and the price of housing rises by 38 percent, it is

A) certain the consumer price index CPI) has increased, and if your nominal wage has risen by less than 38 percent, your real wage has fallen.
B) certain the consumer price index CPI) has increased, and if your nominal wage has risen by more than 38 percent, your real wage has risen.
C) possible that the consumer price index CPI) has increased, but it is certain your real wage has fallen.
D) possible that the consumer price index CPI) has increased; however, it is certain your real wage has risen if, and only if, your nominal wage increased by more than 19 percent because housing accounts for exactly 50 percent of the CPI.
E) not possible to tell what happened to the consumer price index CPI) because other than for housing, we do not know what happened to the prices of any of the other goods.

Question 38

According to the July 2015 consumer price index CPI), the top three consumer expenditure categories are, respectively,

A) housing, transportation, and entertainment.
B) transportation, housing, and energy.
C) housing, medical care, and food and beverages.
D) transportation, housing, and medical care.
E) housing, transportation, and food and beverages.

Question 39

In Bovania, milk constitutes 56 percent of the typical basket of goods for a typical consumer. Let's say the price of milk rises by 4 percent and the prices of all other goods fall by 10 percent. Based on the information given, we can definitely say

A) the consumer price index CPI) in Bovania is greater than in the previous year.
B) the consumer price index CPI) in Bovania is less than in the previous year.
C) if consumers get a 4 percent pay raise, they are worse off in terms of their real income compared to inflation as measured by the Bovanian consumer price index CPI).
D) because milk is a necessity, consumers are automatically worse off no matter what pay increase they may have received.
E) shoe-leather costs have decreased.

Question 40

If housing prices increase by 25 percent and the price of all other goods decreases by 22 percent, then

A) the consumer price index CPI) would definitely fall during the year in question because housing prices do not constitute the majority of the CPI.
B) the consumer price index CPI) would definitely rise during the year in question because housing prices do constitute the majority of the CPI.
C) the consumer price index CPI) would rise by about 1.5 percent because housing constitutes about half of the market basket in the CPI.
D) because housing spending is considered an investment, the producer price index PPI) but not the consumer price index CPI) would be the only price index affected by the change.
E) the consumer price index CPI) would only be affected in a small way because it includes about 8,000 goods and housing is only one of the 8,000.

Question 41

Consider a nation in which the price index was 150 last year and this year it is 130. Which statement is correct?

A) Inflation was 20 percent this year.
B) Deflation was 20 percent this year.
C) Housing prices must have fallen.
D) Inflation was 13.33 percent this year.
E) Deflation was 13.33 percent this year.

Question 42

If the goods producers buy change dramatically between years, then

A) this would be reflected in both the consumer price index CPI) and the gross domestic product GDP) deflator.
B) this would not be reflected in either the consumer price index CPI) or the gross domestic product GDP) deflator.
C) it would mean the market basket would be automatically updated to reflect the changes.
D) this would be reflected in the gross domestic product GDP) deflator but not the consumer price index CPI).
E) menu costs would fall.

Question 43

Consider a nation in which the price index last year was 130 and this year it is 150. Which statement is correct?

A) Inflation was 20 percent this year.
B) Deflation was 20 percent this year.
C) Housing prices must have risen.
D) Inflation was 15 percent this year.
E) Deflation was 15 percent this year.

Question 44

If people bought the same market basket of goods as the average consumer again and again the

A) consumer price index CPI) would be extremely accurate.
B) consumer price index CPI) would be less accurate.
C) gross domestic product GDP) deflator would be more accurate.
D) gross domestic product GDP) deflator would be less accurate.
E) consumer price index CPI) would be biased upward relative to the GDP deflator.

Question 45

Refer to the following figure to answer the next four questions:

Based on the figure, one could correctly state that

A) although U.S. inflation was generally higher in the 1970s and 1980s, that situation was reversed in the later years for the European Union.
B) inflation in both the United States and the European Union was higher in the 1990s than it was in the 1970s and 1980s.
C) deflation was a problem in the United States and the European Union in the 1990s, but inflation was a problem for both in the 1970s and 1980s.
D) U.S. and E.U. inflation both tended to be higher in the 1970s and 1980s than in the 1990s.
E) typically, while the European Union had inflation problems, the United States had deflation problems.

Question 46

Michael Chang buys only tennis rackets during a particular year. During the year in question, the price of all goods rises by 10 percent on average, but the price of tennis rackets remains the same. Which statement is correct?

A) Michael benefits from inflation.
B) Michael does not experience inflation because he only buys tennis rackets.
C) No matter what Michael buys, he experiences inflation.
D) Michael does not benefit from inflation.
E) We can't conclude anything from the information given.

Question 47

Refer to the following figure to answer the next four questions:

Based on the figure, one could correctly state that

A) typically, U.S. inflation was greater than E.U. inflation, with some very brief exceptions.
B) typically, E.U. inflation was greater than U.S. inflation, with some very brief exceptions.
C) there is no consistent relationship between U.S. and E.U. inflation.
D) typically, U.S. and E.U. inflation move together, but E.U. inflation had a much larger variance than that experienced in the United States.
E) typically, U.S. and E.U. inflation move in opposite directions and U.S. inflation had a much larger variance than that experienced by the European Union.

Question 48

How do you convert a price of a good from an earlier time into today's price?

A) Take the earlier price and divide by today's price, then multiply by the ratio of the consumer price index CPI) today to that of the CPI in the old year.
B) Take the earlier price and multiply by the ratio of the earlier gross domestic product GDP) deflator to today's consumer price index.
C) Take today's price and divide by the earlier price in terms of the gross domestic product GDP) deflator.
D) Take the earlier price and multiply by the ratio of today's consumer price index CPI) to the earlier CPI.
E) Take the earlier price and multiply by the ratio of the earlier consumer price index CPI) to the current CPI.

Question 49

The long-run inflation rate in the United States is about

A) 20 percent.
B) 10 percent.
C) 4 percent.
D) 2 percent.
E) -4 percent.

Question 50

In terms of inflation, the period from the mid-1980s until today in the United States is called the "Great Moderation." This refers to the fact that

A) the hyperinflation rates of 100 percent or more experienced during the 1960s, 1970s, and 1980s have been replaced by moderate rates of inflation averaging about 12 percent.
B) the inflation of the 1960s, 1970s, and early 1980s has been replaced by deflation.
C) the deflation of the 1960s, 1970s, and early 1980s has been replaced by moderate inflation under 10 percent).
D) the double-digit inflation of the 1970s and 1980s has been replaced by well-controlled inflation of less than 10 percent.
E) inflation now fluctuates between 0 percent and 20 percent, whereas in the 1970s and 1980s, it fluctuated more wildly and at higher rates.

Question 51

Suppose that the consumer price index of a country was 160 at Year 1 and 164 at the end of Year 2. What was the country's inflation rate during Year 2?

A) 5 percent
B) 2.5 percent
C) 64 percent
D) 164 percent
E) 32 percent

Question 52

The concept of a price index is that it is an)

A) measure of how the items included in the typical basket of goods have changed over time; it also includes price changes over time.
B) measure of how the items included in the typical basket of goods have changed over time, while holding price changes constant.
C) measure of how the prices included in the typical basket of goods have changed over time, holding the items in the consumption bundle constant.
D) index of how much gasoline prices have increased, because all prices follow the price of gasoline.
E) index of how much housing prices have changed, because housing is the most important item in the consumption bundle.

Question 53

Refer to the following figure to answer the next four questions:

As presented in the figure, one could correctly state that

A) U.S. inflation and E.U. inflation were directly related, but E.U. inflation was generally more than U.S. inflation.
B) U.S. inflation and E.U. inflation were inversely related, but E.U. inflation was generally more than U.S. inflation.
C) U.S. inflation and E.U. inflation were directly related, but U.S. inflation was generally more than E.U. inflation.
D) U.S. inflation and E.U. inflation were inversely related, but U.S. inflation was generally more than E.U. inflation.
E) both the United States and the European Union experienced deflation from about mid-1980 until about mid-1986.

Question 54

Refer to the following figure to answer the next four questions:

As presented in the figure, one could correctly state that during the period shown

A) the United States and the European Union generally experienced periods of both inflation and deflation.
B) generally, the United States experienced deflation, but the European Union experienced inflation.
C) generally, the European Union experienced more deflation than the United States did.
D) there was never a time when either the United States or the European Union experienced deflation.
E) there were brief periods of hyperinflation for both the United States and European Union in the 1970s and early 1980s.

Question 55

In Bovania, milk constitutes 56 percent of the typical basket of goods for a typical consumer. Let's say the price of milk rises by 7 percent and the prices of all other goods fall by 4 percent. Based on the information given, we can definitely say

A) the consumer price index CPI) in Bovania is greater than in the previous year.
B) the consumer price index CPI) in Bovania is less than in the previous year.
C) if consumers get a 4 percent pay raise, they are worse off in terms of their real income compared to inflation as measured by the Bovanian consumer price index CPI).
D) the gross domestic product GDP) deflator must be higher than the consumer price index CPI).
E) the gross domestic product GDP) deflator must be less than the consumer price index CPI).

Question 56

You know that the consumer price index CPI) at the beginning of this year was 250 and the rate of inflation was 14 percent; this would mean the

A) price of cat food increased by exactly 14 percent.
B) CPI at the beginning of last year was 215.
C) price of dog food probably fell.
D) CPI at the end of the year was 285.
E) rate of inflation next year will be more than 14 percent.

Question 57

The percentage change in any economic variable, including the consumer price index CPI), is measured by which equation?

A) Previous Year - Current Year) / Previous Year) * 100
B) Current Year - Previous Year) / Previous Year) * 100
C) Current Year - Previous Year) / Current Year) * 100
D) Previous Year - Current Year) / Previous Year
E) Current Year - Previous Year) / Previous Year

Question 58

In Nation A, the price index rises from 110 to 120 in a particular year. In the same year, the price level rises from 120 to 130 in Nation B. This means

A) inflation in both nations is 10 percent.
B) Nation B suffers from hyperinflation.
C) both nations suffer from hyperinflation.
D) Nation A is experiencing inflation but Nation B is experiencing deflation.
E) Nation A is experiencing inflation of less than 9.1 percent and Nation B is experiencing inflation of less than 8.4 percent.

Question 59

Which statement best represents the purpose for measuring annual inflation or deflation)?

A) The main purpose is to find out how much the price of gasoline has increased from year to year.
B) The main purpose is to find out whether more goods have increased or decreased) in price compared to the number of goods whose price has decreased or increased).
C) The main purpose is to find out whether the overall cost of living has changed.
D) The main purpose is to find out whether the economy has produced more goods this year than last year.
E) The main purpose is to find out whether the cost of entertainment is more expensive or cheaper) this year than last year.

Question 60

It is rare when prices fall in modern times. However, it is likely that they would fall during severe recessions. In what year is this most likely to have occurred?

A) 2005
B) 2009
C) 2011
D) 2012
E) 2003

Question 61

If a Hershey's chocolate bar cost $0.05 in 1921 when the price index was 18 and the same size and weight Hershey's chocolate bar cost $0.05 in 1955 when the price index was 27, then

A) the inflation-adjusted price of the bar would be lower in 1955 than in 1921.
B) the inflation-adjusted price of the bar would be higher in 1955 than in 1921.
C) Hershey's mispriced the bar due to a price confusion problem.
D) the United States must have experienced deflation during the period from 1921-1955.
E) menu costs for Hershey's were high.

Question 62

Assume tuition at Penn State cost $6,142 per semester) in 2007 and $7,562 in 2012. If the price index was 207.34 in 2007 and 226 in 2012, then we could say tuition

A) has increased more slowly than inflation.
B) has increased more rapidly than inflation.
C) has increased at about the same rate as inflation.
D) is an inferior good.
E) suffers from menu costs due to inflation.

Question 63

The chained consumer price index CPI) tends to more accurately reflect prices by updating the consumer basket of goods

A) every time any price in the typical consumer basket changes.
B) daily.
C) weekly.
D) monthly.
E) annually.

Question 64

One improvement of the chained consumer price index CPI) over the traditional CPI is that the

A) chained CPI more quickly takes into account new goods.
B) chained CPI accounts for substitution between goods.
C) chained CPI is "progressive," whereas the traditional CPI is "regressive."
D) traditional CPI accounts only for the prices of goods, whereas, the chained CPI accounts for the prices of services, as well.
E) chained CPI more easily accounts for deflation.

Question 65

Assume tuition at Houston Community College cost $588 per semester) in 2004 and $813 in 2012. If the price index was 184 in 2004 and 226 in 2012, then we could say

A) tuition has increased more slowly than inflation.
B) tuition has increased more rapidly than inflation.
C) tuition has increased at about the same rate as inflation.
D) nominal tuition has decreased.
E) tuition suffers from menu costs due to inflation.

Question 66

To convert a current price of a product to its price in the past, we would take the current price of a product and

A) divide by the current price index and then add the previous price index.
B) multiply by the ratio of the current price index to the previous price index.
C) multiply by the ratio of the previous price index to the current price index.
D) divide by the ratio of the previous price index to the current price index.
E) average the chain-weighted consumer price index CPI) and the traditional CPI of the previous year, and then multiply the current price by the average of the two.

Question 67

According to the textbook, the top-grossing movie of all time adjusted for inflation) is

A) Avatar.
B) Blade Runner.
C) Every Which Way but Loose.
D) Star Wars.
E) Gone with the Wind.

Question 68

Donna Newton made $0.30 per hour in 1946 at a small restaurant in Clearfield, Pennsylvania. If the consumer price index CPI) was 18.3 in 1946 and 202.4 in 2011 and the legal minimum wage in 2011 was $7.25, then

A) Donna's inflation-adjusted wage would be greater than the legal minimum wage in 2011.
B) Donna's inflation-adjusted wage would be less than the legal minimum wage in 2011.
C) Donna's inflation-adjusted wage would be equal to the legal minimum wage in 2011.
D) Donna would suffer from money illusion in 2011 if her real wage rose, holding her nominal wage constant.
E) because of deflation in the years between 1946 and 2011, the inflation-adjusted wage would exceed the legal minimum in 2011.

Question 69

According to the textbook, the fully completed house that one could buy from the Sears catalog in 1924 would be

A) exorbitantly expensive by today's standards, adjusting for inflation.
B) about the typical price of a house today, adjusting for inflation.
C) of abnormally low quality and hence commanding a much lower price, even when adjusting for inflation.
D) quite a good deal, even when adjusting for inflation.
E) affordable to even the poorest Americans and would help to provide "sustainable growth."

Question 70

Donna Newton made $0.30 per hour in 1946 at a small restaurant in Clearfield, Pennsylvania. If the consumer price index CPI) was 18.3 in 1946 and 202.4 in 2011, then Donna's inflation-adjusted wage would be

A) $7.25, by U.S. law.
B) $0.30.
C) $2.87.
D) $0.61.
E) $3.32.

Question 71

If mustard now costs $0.75 when today's price index is 225, and if the price index in 1970 was 38, we would most accurately say that

A) mustard cost about $4.44 in 1970.
B) if mustard cost $0.10 in 1970, it was relatively cheap as an inflation-adjusted price.
C) mustard cost about $0.20 in 1970.
D) mustard's price would never increase at the same rate as inflation because it is a food item.
E) ketchup would cost about $0.13 in 1970 because it typically costs about the same as mustard.

Question 72

Assume tuition at the University of Virginia cost $2,962 per semester) in 2004 and $11,584 in 2012. If the price index was 184 in 2004 and 226 in 2012, then we could say

A) tuition has increased more slowly than inflation.
B) tuition has increased much more rapidly than inflation.
C) tuition has increased at about the same rate as inflation.
D) nominal tuition has decreased.
E) tuition suffers from menu costs due to inflation.

Question 73

The ratio Price Level in Earlier Time) / Price Level Today) would be used to

A) convert the consumer price index CPI) to the gross domestic product GDP) deflator.
B) convert today's price to an earlier price, adjusting for inflation.
C) find the percentage of substitution bias.
D) find the percentage of the quality change bias.
E) convert an earlier price to today's price, adjusting for inflation.

Question 74

If the price index in 1922 was 17 and a unit of Nabisco Oreo cookies cost $0.32, and if the price index today is 220 and a unit of Nabisco Oreo cookies costs $2.99, then the inflation-adjusted price of Oreos today is

A) almost exactly the same within 10 percent) as in 1922.
B) much higher twice or more) than in 1922.
C) much lower half or less) than in 1922.
D) a bit higher than in 1922.
E) a bit lower than in 1922.

Question 75

In 1940 you could buy a "nickel Pepsi" for oddly enough) a nickel. If the price index in 1940 was 14 and the 2011 price index was 221, then the inflation-adjusted price of a Pepsi would be

A) a nickel $0.05).
B) a dime $0.10).
C) about 79 cents $0.79).
D) about $1.21.
E) $0.00317.

Question 76

Assume tuition and fees at North Carolina State University cost $4,259 in 2004 and $7,787 in 2012. If the price index was 184 in 2004 and 226 in 2012, then we could say

A) tuition has increased more slowly than inflation.
B) tuition has increased more rapidly than inflation.
C) tuition has increased at about the same rate as inflation.
D) nominal tuition has decreased.
E) tuition suffers from money illusion due to inflation.

Question 77

If the value of the consumer price index CPI) in 2013 was 135 and the value of the CPI in 2012 was 117, we could correctly say that the

A) typical basket of goods was about 18 percent more expensive in 2013 than in 2012.
B) typical basket of goods was about 18 percent less expensive in 2013 than in 2012.
C) typical basket of goods was about 15.4 percent more expensive in 2013 than in 2012.
D) average price of all items included in gross domestic product GDP) was about 18 percent more expensive in 2013 than in 2012.
E) average price of all items included in gross domestic product GDP) was about 15.4 percent more expensive in 2013 than in 2012.

Question 78

Let's say a bottle of Dr. Wells an actual soft drink still available but hard to obtain) cost $0.15 in 1970. If the consumer price index CPI) in 1970 was 37.8 and the current CPI is 240, then the inflation-adjusted price of Dr. Wells would be rounded to the nearest penny)

A) $0.0236.
B) $2.36.
C) about a dollar.
D) $0.95
E) $95.00.

Question 79

The price of a McDonald's hamburger in 1955 was $0.15 when the price index was 27; if in 2011 it was $0.89 when the price index was 220, then adjusted for inflation, the price of a McDonald's hamburger in 2011 was

A) almost exactly the same within 10 percent) as in 1955.
B) much higher twice or more) than in 1955.
C) much lower half or less) than in 1955.
D) a bit higher than in 1955.
E) a bit lower than in 1955.

Question 80

Assume the price of salt increased from $0.30 in 1985 to $0.50 in 1995. If we calculate the average rate of price increase for salt over this period, we could accurately say the

A) price of salt increased at about a 40 percent rate per year during this period.
B) price of salt increased at about a 20 percent rate per year during this period.
C) price of salt increased by about 20 percent total during this period.
D) price of salt increased at about a 5 percent rate per year during this period.
E) real price of salt definitely increased during the period.