Deck 24: Measuring the Cost of Living

Question 1

When computing the cost of the basket of goods and services purchased by a typical consumer,which of the following changes from year to year?

A)the quantities of the goods and services purchased
B)the prices of the goods and services
C)the goods and services making up the basket
D)All of the above are correct.

Answer 1

B

Question 2

If the cost of transportation increases by 20 percent,then,other things the same,the CPI is likely to increase by about

A)0.3 percent.
B)1.7 percent.
C)3.4 percent.
D)10 percent.

Answer 2

C

Question 3

Which of the following changes in the price index produces the greatest rate of inflation: 80 to 100,100 to 120,or 150 to 170?

A)80 to 100
B)100 to 120
C)150 to 170
D)All of these changes produce the same rate of inflation.

Answer 3

A

Question 4

Suppose the price index was 105 in 2007,115.5 in 2008,and the inflation rate was lower between 2008 and 2009 than it was between 2007 and 2008.This means that

A)the price index in 2009 was lower than 115.5.
B)the price index in 2009 was lower than 126.
C)the price index in 2009 was lower than 127.05.
D)the inflation rate between 2008 and 2009 was lower than 1.1 percent.

Question 5

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

A)a typical consumer,and the CPI is computed and reported by the Department of the Treasury.
B)typical consumers and typical business firms,and the CPI is computed and reported by the Department of the Treasury.
C)a typical consumer,and the CPI is computed and reported by the Bureau of Labor Statistics.
D)typical consumers and typical business firms,and the CPI is computed and reported by the Bureau of Labor Statistics.

Question 6

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.

Question 7

The inflation rate is calculated

A)by determining the change in the price index from the preceding period.
B)by adding up the price increases of all goods and services.
C)by computing a simple average of the price increases for all goods and services.
D)by determining the percentage increase in the price index from the preceding period.

Question 8

If the consumer price index was 100 in the base year and 107 in the following year,then the inflation rate was

A)1.07 percent.
B)7 percent.
C)10.7 percent.
D)107 percent.

Question 9

From 2008 to 2009,the CPI for medical care increased from 150.8 to 164.4.What was the inflation rate for medical care?

A)4.4 percent
B)7.6 percent
C)9.0 percent
D)12.1 percent

Question 10

In the basket of goods that is used to compute the consumer price index,the three largest categories of consumer spending are

A)housing,transportation,and recreation.
B)housing,transportation,and food & beverages.
C)housing,food & beverages,and education & communication.
D)housing,medical care,and education & communication.

Question 11

For an imaginary economy,the consumer price index was 115.00 in 2004,126.50 in 2005,and 136.62 in 2006.Which of the following statements is correct?

A)For this economy,the base year must be 2004.
B)If the basket of goods that is used to calculate the CPI cost $75.00 in the base year,then that basket of goods cost $115.00 in 2004.
C)This economy's rate of inflation for 2006 is 10.12 percent.
D)None of the above is correct.

Question 12

In the calculation of the CPI,books are given greater weight than magazines if

A)consumers buy more books than magazines.
B)the price of books is higher than the price of magazines.
C)it costs more to produce books than it costs to produce magazines.
D)books are more readily available than magazines to the typical consumer.

Question 13

The steps involved in calculating the consumer price index and the inflation rate,in order,are as follows:

A)Choose a base year,update the basket,find the prices,estimate the basket's cost,compute the index,and compute the inflation rate.
B)Choose a base year,fix the basket,find the prices,compute the inflation rate,compute the basket's cost,and compute the index.
C)Fix the basket,find the prices,compute the basket's cost,choose a base year and compute the index,and compute the inflation rate.
D)Fix the basket,find the prices,compute the inflation rate,compute the basket's cost,and choose a base year and compute the index.

Question 14

Suppose that in 2010,the producer price index increases by 1.5 percent.As a result,economists most likely will predict that

A)GDP will increase in 2011.
B)the producer price index will increase by more than 1.5 percent in 2011.
C)interest rates will decrease in the future.
D)the consumer price index will increase in the future.

Question 15

If 2004 is the base year,then the inflation rate for 2005 equals

A) $\frac{\text { CPI in } 2005-\mathrm{CPI} \text { in } 2004}{\text { CPI in } 2004} \times 100$
B) $\frac { \text { CPI in } 2005 - \text { CPI in } 2004 } { \text { CPI in } 2005 } \times 100 .$
C) $\frac { \text { CPI in } 2004 - \text { CPI in } 2005 } { \text { CPI in } 2004 } \times 100 .$
D) $\frac { \text { CPI in } 2004 - \text { CPI in } 2005 } { \text { CPI in } 2005 } \times 100$

Question 16

By far the largest category of goods and services in the CPI basket is

A)housing.
B)transportation.
C)education & communication.
D)food & beverages.

Question 17

The producer price index measures the cost of a basket of goods and services

A)typically produced in the economy.
B)produced for a typical consumer.
C)sold by producers.
D)bought by firms.

Question 18

Which of the following is correct?

A)The GDP deflator is better than the CPI at reflecting the goods and services bought by consumers.
B)The CPI is better than the GDP deflator at reflecting the goods and services bought by consumers.
C)The GDP deflator and the CPI are equally good at reflecting the goods and services bought by consumers.
D)The GDP deflator is more commonly used as a gauge of inflation than the CPI is.

Question 19

The price index was 110 in the first year,100 in the second year,and 96 in the third year.The economy experienced

A)9.1 percent deflation between the first and second years,and 4 percent deflation between the second and third years.
B)9.1 percent deflation between the first and second years,and 4.2 percent deflation between the second and third years.
C)10 percent deflation between the first and second years,and 4 percent deflation between the second and third years.
D)10 percent deflation between the first and second years,and 4.2 percent deflation between the second and third years.

Question 20

What basket of goods and services is used to construct the CPI?

A)a random sample of all goods and services produced in the economy
B)the goods and services that are typically bought by consumers as determined by government surveys
C)only food,clothing,transportation,entertainment,and education
D)the least expensive and the most expensive goods and services in each major category of consumer expenditures

Question 21

Indexation refers to

A)a process of adjusting the nominal interest rate so that it is equal to the real interest rate.
B)using a law or contract to automatically correct a dollar amount for the effects of inflation.
C)using a price index to deflate dollar values.
D)an adjustment made by the Bureau of Labor Statistics to the CPI so that the index is in line with the GDP deflator.

Question 22

One problem with the consumer price index stems from the fact that,over time,consumers tend to buy larger quantities of goods that have become relatively less expensive and smaller quantities of goods that have become relatively more expensive.This problem is called

A)price-change neglect.
B)unmeasured quality change.
C)substitution bias.
D)relative bias.

Question 23

Assume that consumers consider rice and potatoes to be substitutes,so that when the price of rice rises,consumers purchase less rice and more potatoes.When the CPI is computed following the increase in the price of rice,it takes into account

A)the increase in the price of rice.
B)the decrease in the quantity of rice purchased and the increase in the quantity of potatoes purchased.
C)Both (a)and (b)are correct.
D)None of the above is correct.

Question 24

To which of the problems in the construction of the CPI is the creation of the mobile phone most relevant?

A)substitution bias
B)introduction of new goods
C)unmeasured quality change
D)income bias

Question 25

The consumer price index tires to measure how much consumer incomes must rise in order to maintain a constant

A)level of real GDP.
B)ratio of consumption to GDP.
C)ratio of net exports to GDP.
D)standard of living.

Question 26

Suppose the quality of beef changes over time,but the quality change goes unmeasured for the purpose of computing the consumer price index.In which of the following instances would the bias resulting from the unmeasured quality change be least severe?

A)The quality of beef deteriorates and beef becomes more expensive relative to other goods.
B)The quality of beef deteriorates and beef becomes less expensive relative to other goods.
C)The quality of beef improves and beef becomes more expensive relative to other goods.
D)The quality of beef improves and the price of beef relative to other prices remains unchanged.

Question 27

The nominal interest rate tells you

A)how fast the number of dollars in your bank account rises over time.
B)how fast the purchasing power of your bank account rises over time.
C)the number of dollars in your bank account today.
D)the purchasing power of your bank account today.

Question 28

The real interest rate tells you

A)how fast the number of dollars in your bank account rises over time.
B)how fast the purchasing power of your bank account rises over time.
C)the number of dollars in your bank account today.
D)the purchasing power of your bank account today.

Question 29

Which of the following statements is correct about the relationship between the nominal interest rate and the real interest rate?

A)The real interest rate is the nominal interest rate times the rate of inflation.
B)The real interest rate is the nominal interest rate minus the rate of inflation.
C)The real interest rate is the nominal interest rate plus the rate of inflation.
D)The real interest rate is the nominal interest rate divided by the rate of inflation.

Question 30

By not taking into account the possibility of consumer substitution,the CPI

A)understates the cost of living.
B)overstates the cost of living.
C)may overstate or understate the cost of living,depending on how quickly prices rise.
D)may overstate or understate the cost of living,regardless of how quickly prices rise.

Question 31

Which of the following statements is correct about the relationship between inflation and interest rates?

A)There is no relationship between inflation and interest rates.
B)The interest rate is determined by the rate of inflation.
C)In order to fully understand inflation,we need to know how to correct for the effects of interest rates.
D)In order to fully understand interest rates,we need to know how to correct for the effects of inflation.

Question 32

The primary purpose of measuring the overall level of prices in the economy is to

A)allow for the measurement of GDP.
B)allow consumers to know what kinds of prices to expect in the future.
C)allow for the comparison of dollar figures from different points in time.
D)allow for the comparison of dollar figures from the same point in time.

Question 33

In 1970,Professor Plum earned 12,000 dinars; in 1980,he earned 24,000; and in 1990,he earned 36,000.If the CPI was 40 in 1970,60 in 1980,and 100 in 1990,then in real terms,Professor Plum's salary was highest in

A)1980 and lowest in 1970.
B)1980 and lowest in 1990.
C)1990 and lowest in 1970.
D)1990 and lowest in 1980.

Question 34

Several studies in the 1990s concluded that the consumer price index overstated inflation by about

A)3 percentage points per year,and that number of percentage points likely still applies now.
B)3 percentage points per year,but recent improvements to the CPI probably have reduced the overstatement of inflation to something less than 3 percentage points.
C)1 percentage point per year,and that number of percentage points likely still applies now.
D)1 percentage point per year,but recent improvements to the CPI probably have reduced the overstatement of inflation to something less than 1 percentage point

Question 35

One of the widely acknowledged problems with using the consumer price index as a measure of the cost of living is that the CPI

A)fails to account for consumer spending on housing.
B)accounts only for consumer spending on food,clothing,and energy.
C)fails to account for the fact that consumers spend larger percentages of their incomes on some goods and smaller percentages of their incomes on other goods.
D)fails to account for the introduction of new goods.

Question 36

The substitution bias in the consumer price index refers to the

A)substitution by consumers toward new goods and away from old goods.
B)substitution by consumers toward a smaller number of high-quality goods and away from a larger number of low-quality goods.
C)substitution by consumers toward goods that have become relatively less expensive and away from goods that have become relatively more expensive.
D)substitution of new prices for old prices in the CPI basket of goods and services from one year to the next.

Question 37

Which of the following statements is true?

A)Even if we know the values of the consumer price index for the years 2009 and 2010,we cannot calculate the inflation rate for 2010 if we do not know which year is the base year.
B)If we know the base year is 1990,and if we know the value of the consumer price index for the year 2010,then we have all the information we need to calculate the inflation rate for 2010.
C)If we know the base year is 2000,and if we know the value of the consumer price index for the year 1995,then we have all the information we need to calculate the inflation rate for 1995.
D)If we know the base year is 2000,and if we know the value of the consumer price index for the year 1995,then we have all the information we need to calculate the percentage change in the cost of living between 1995 and 2000.

Question 38

A decrease in the price of domestically produced industrial robots will be reflected in

A)both the GDP deflator and the consumer price index.
B)neither the GDP deflator nor the consumer price index.
C)the GDP deflator but not in the consumer price index.
D)the consumer price index but not in the GDP deflator.

Question 39

Suppose the CPI was 108 in 1967,and suppose one must spend 936 dollars today to obtain the same basket of goods and services that could be bought for 200 dollars in 1967.Then today's CPI is

A)116.67.
B)131.08.
C)397.44.
D)505.44.

Question 40

When the relative price of a good increases,consumers respond by buying

A)a larger quantity of that good and a larger quantity of substitutes for that good.
B)a larger quantity of that good and a smaller quantity of substitutes for that good.
C)a smaller quantity of that good and a larger quantity of substitutes for that good.
D)a smaller quantity of that good and a smaller quantity of substitutes for that good.

Question 41

Jake loaned Elwood 5,000 dollars for one year at a nominal interest rate of 10 percent.After Elwood repaid the loan in full,Jake complained that he could buy 4 percent fewer goods with the money Elwood gave him than he could before he loaned Elwood the money.From this,we can conclude that the rate of inflation during the year was

A)-4 percent.
B)4 percent.
C)6 percent.
D)14 percent.

Question 42

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

Question 43

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

Question 44

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 45

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

Question 46

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 47

As long as prices are rising over time,then

A)the nominal interest rate exceeds the real interest rate.
B)the real interest rate exceeds the nominal interest rate.
C)the real interest rate is positive.
D)the nominal interest rate is a better indicator than the real interest rate of how fast the purchasing power of your bank account is changing over time.

Question 48

The consumer price index was 225 in 2006 and 234 in 2007.The nominal interest rate during this period was 6.5 percent.What was the real interest rate during this period?

A)2.5 percent
B)4.0 percent
C)6.76 percent
D)10.5 percent

Question 49

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

Question 50

If the nominal interest rate is 8 percent and the rate of inflation is 3 percent,then the real interest rate is

A)-5 percent.
B)1.67 percent.
C)5 percent.
D)11 percent.

Question 51

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

Question 52

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

Question 53

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

Question 54

If the nominal interest rate is 8 percent and the real interest rate is 5.5 percent,then the inflation rate is

A)-2.5 percent.
B)0.45 percent.
C)2.5 percent.
D)13.5 percent.

Question 55

Which of the following is correct?

A)Nominal and real interest rates always move together.
B)Nominal and real interest rates never move together.
C)Nominal and real interest rates do not always move together.
D)Nominal and real interest rates always move in opposite directions.

Question 56

When looking at a graph of nominal and real interest rates you notice that nominal rates always lie above real rates.From this you conclude

A)there were serious episodes of deflation in the time frame represented on the graph.
B)consumer prices were always rising in the time frame represented on the graph.
C)the economy never experienced a recession in the time frame represented on the graph.
D)GDP was always increasing for the time frame represented on the graph.

Question 57

Suppose that over the past year,the real interest rate was 5 percent and the inflation rate was 3 percent.It follows that

A)the value of savings increased at 5 percent,and the purchasing power of savings increased at 2 percent.
B)the value of savings increased at 5 percent,and the purchasing power of savings increased at 8 percent.
C)the value of savings increased at 8 percent,and the purchasing power of savings increased at 2 percent.
D)the value of savings increased at 8 percent,and the purchasing power of savings increased at 5 percent.

Question 58

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

Question 59

Consumer price index = $\frac{\text{Price of basket of goods and services in base year}}{\text{Price of basket in current year}}$ * 100.

Question 60

The CPI was 120 in 2008 and 126 in 2009.Phil borrowed money in 2008 and repaid the loan in 2009.If the nominal interest rate on the loan was 8 percent,then the real interest rate was

A)-2 percent.
B)3 percent.
C)5 percent.
D)13 percent.

Question 61

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

Question 62

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 63

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

Question 64

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

Question 65

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

Question 66

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 67

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

Question 68

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

Question 69

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?