Deck 24: Measuring the Cost of Living

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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 10

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

Question 11

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.

Question 12

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 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

The CPI is always 1 in the base year.

Question 19

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 20

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.

Question 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

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 26

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 27

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 28

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 29

Data from the Bureau of Labor Statistics show that consumer spending on medical care is about equal to consumer spending on recreation and consumer spending on education and communication.

Question 30

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 31

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

Question 32

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

Question 33

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 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

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 40

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

Question 41

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

Question 42

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 43

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

Question 44

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 45

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

Question 46

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 47

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 48

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

Question 49

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 50

A COLA automatically raises the wage when the CPI rises.

Question 51

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

Question 52

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

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

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 55

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 56

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

Question 57

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 58

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

Question 59

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

Question 60

The real interest rate measures the change in dollar amounts.

Question 61

Compute how much each of the following items is worth in terms of today's dollars using 177 as the price index for today.
a.
In 1926,the CPI was 17.7 and the price of a movie ticket was $0.25.
b.
In 1932,the CPI was 13.1 and a cook earned $15.00 a week.
c.
In 1943,the CPI was 17.4 and a gallon of gas cost $0.19.

Question 62

Economists use the term inflation to describe a situation in which

A) some prices are rising faster than others.
B) the economy's overall price level is rising.
C) the economy's overall price level is high,but not necessarily rising.
D) the economy's overall output of goods and services is rising faster than the economy's overall price level.

Question 63

When the consumer price index falls,the typical family

A) has to spend more dollars to maintain the same standard of living.
B) can spend fewer dollars to maintain the same standard of living.
C) finds that its standard of living is not affected.
D) can save less because they do not need to offset the effects of rising prices.

Question 64

In a simple economy,people consume only 2 goods,food and clothing.The market basket of goods used to compute the CPI consists of 50 units of food and 10 units of clothing.

a.
What are the percentage increases in the price of food and in the price of clothing?
b.
What is the percentage increase in the CPI?
c.
Do these price changes affect all consumers to the same extent? Explain.

Question 65

Babe Ruth,the famous baseball player,earned $80,000 in 1931.Today,the best baseball players can earn more than 300 times as much as Babe Ruth earned in 1931.However,prices have also risen since 1931.We can conclude that

A) the best baseball players today are about 300 times better off than Babe Ruth was in 1931.
B) because prices have also risen,the standard of living of baseball stars hasn't changed since 1931.
C) one cannot make judgments about changes in the standard of living based on changes in prices and changes in incomes.
D) one cannot determine whether baseball stars today enjoy a higher standard of living than Babe Ruth did in 1931 without additional information regarding increases in prices since 1931.

Question 66

The consumer price index is used to

A) convert nominal GDP into real GDP.
B) turn dollar figures into meaningful measures of purchasing power.
C) characterize the types of goods and services that consumers purchase.
D) measure the quantity of goods and services that the economy produces.

Question 67

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

Question 68

Which is likely to have the larger effect on the CPI,a 2 percent increase in the price of food or a 3 percent increase in the price of diamond rings? Explain.

Question 69

When the consumer price index rises,the typical family

A) has to spend more dollars to maintain the same standard of living.
B) can spend fewer dollars to maintain the same standard of living.
C) finds that its standard of living is not affected.
D) can offset the effects of rising prices by saving more.

Question 70

Which of the following is not correct?

A) The consumer price index gives economists a way of turning dollar figures into meaningful measures of purchasing power.
B) The consumer price index is used to monitor changes in the cost of living over time.
C) The consumer price index is used by economists to measure the inflation rate.
D) The consumer price index is used to measure the quantity of goods and services that the economy is producing.

Question 71

When the overall level of prices in the economy is increasing,economists say that the economy is experiencing

A) economic growth.
B) stagflation.
C) inflation.
D) deflation.

Question 72

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 73

Why does the GDP deflator give a different rate of inflation than the CPI?

Question 74

List the three major problems in using the CPI as a measure of the cost of living.

Question 75

The term inflation is used to describe a situation in which

A) the overall level of prices in the economy is increasing.
B) incomes in the economy are increasing.
C) stock-market prices are rising.
D) the economy is growing rapidly.

Question 76

The U.S.economy has experienced rising consumer prices in every year since 1965.

Question 77

Jay and Joyce meet George,the banker,to work out the details of a mortgage.They all expect that inflation will be 2 percent over the term of the loan,and they agree on a nominal interest rate of 6 percent.As it turns out,the inflation rate is 5 percent over the term of the loan.
a.
What was the expected real interest rate?
b.
What was the actual real interest rate?
c.
Who benefited and who lost because of the unexpected inflation?

Question 78

The U.S.economy has never experienced deflation.

Question 79

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 80

The consumer price index is used to

A) monitor changes in the level of wholesale prices in the economy.
B) monitor changes in the cost of living over time.
C) monitor changes in the level of real GDP over time.
D) monitor changes in the stock market.