Question 1

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.

Accepted Answer

We can calculate the inflation-adjusted price of the Hershey's chocolate bar in 1955 by using the formula:

(price of item in year B / price index in year B) x price index in year A = inflation-adjusted price in year A

Using this formula, we get:

(0.05 / 27) x 18 = 0.033

So the inflation-adjusted price of the Hershey's chocolate bar in 1921 dollars would be $0.033. Since this is lower than the actual price of $0.05 in 1921, we can conclude that the inflation-adjusted price of the bar would be lower in 1955 than in 1921. Therefore, the correct choice is A.

Question 2

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.

Accepted Answer

To determine whether tuition has increased faster or slower than inflation, we need to compare the change in the price index to the change in tuition. Between 2007 and 2012, the price index increased by a factor of 226/207.34 = 1.089, or 8.9%. Meanwhile, tuition increased from $6,142 to $7,562, a difference of (7,562-6,142)/6,142 = 23%. Therefore, tuition has increased more rapidly than inflation.

Question 3

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.

Accepted Answer

The chained CPI updates the consumer basket of goods monthly, making it more accurate than the traditional CPI which updates the basket less frequently.

Question 4

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.

Accepted Answer

The answer of One improvement of the chained consumer price...

Question 5

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.

Accepted Answer

We can calculate the inflation rate from 2004 to 2012 as (226-184)/184 = 0.228, or 22.8%. The percentage increase in tuition is (813-588)/588 = 0.381, or 38.1%. Since 38.1% is greater than 22.8%, we can say that tuition has increased more rapidly than inflation.

Question 6

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.

Accepted Answer

To convert a current price of a product to its price in the past, we need to adjust for inflation using a price index. We can use the ratio of the previous price index to the current price index to adjust the current price to the past. This is because the price index reflects the change in prices over time, and by dividing the current price by the ratio of the previous price index to the current price index, we can adjust for the change in prices and obtain the price of the product in the past. Therefore, option C is the correct choice.

Question 7

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.

Accepted Answer

Gone with the Wind is the top-grossing movie of all time when adjusted for inflation, with a total box office gross of over $3.7 billion. Avatar is the top-grossing movie of all time when not adjusted for inflation, but it falls to number 15 on the adjusted list. Blade Runner and Every Which Way but Loose are not even on the top 100 adjusted list, and while Star Wars is a close contender, it falls short of the top spot with a total gross of just over $3 billion.

Question 8

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.

Accepted Answer

In order to compare the value of Donna's wage in 1946 to the value of wages in 2011, we need to adjust for inflation. We can use the CPI to do this. First, we need to calculate the inflation rate from 1946 to 2011:

Inflation rate = (CPI in 2011 - CPI in 1946) / CPI in 1946
Inflation rate = (202.4 - 18.3) / 18.3
Inflation rate = 10.11

This means that prices overall increased by a factor of 10.11 between 1946 and 2011. In other words, something that cost $1 in 1946 would cost $10.11 in 2011.

To adjust Donna's wage for inflation, we can multiply it by the inflation rate:

Inflation-adjusted wage = Wage in 1946 x (CPI in 2011 / CPI in 1946)
Inflation-adjusted wage = $0.30 x (202.4 / 18.3)
Inflation-adjusted wage = $3.33

This means that, adjusted for inflation, Donna's wage in 1946 would be equivalent to earning $3.33 in 2011. Since the legal minimum wage in 2011 was $7.25, Donna's inflation-adjusted wage would be less than the legal minimum wage in 2011. Therefore, the best choice is B.

Question 9

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."

Accepted Answer

According to the textbook, the fully completed house that one could buy from the Sears catalog in 1924 would cost around $2,500, which would be equivalent to about $36,000 today, adjusting for inflation. This would be considered a very good deal compared to the average cost of a house today, which is around $200,000.

Question 10

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.

Accepted Answer

To calculate Donna's inflation-adjusted wage, we need to use the formula:

adjusted wage = nominal wage x (CPI in the year we want to adjust to / CPI in the year the wage was earned)

Plugging in the numbers we get:

adjusted wage = $0.30 x (202.4/18.3) = $3.32

Therefore, the answer is E, $3.32.

Question 11

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.

Accepted Answer

To adjust the price of mustard from today to its equivalent in 1970, we use the formula for adjusting prices based on the consumer price index (CPI), which is: Price in 1970 = (Price Today) * (CPI in 1970 / CPI Today). Substituting the given values, we get: $0.75 * (38 / 225) ≈ $0.127. This means that if mustard cost $0.10 in 1970, it was cheaper than the inflation-adjusted price, making option B correct. The calculation disproves A and C directly, D is incorrect because food items can indeed increase at the rate of inflation, and E is not supported by the information given.

Question 12

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.

Accepted Answer

To determine if tuition has increased more rapidly than inflation, we need to compare the percentage increase in tuition costs to the percentage increase in the price index. From 2004 to 2012, the price index increased by 226/184 = 1.23 or 123%. Meanwhile, tuition costs increased from $2,962 to $11,584, which is a 290% increase. This means that tuition costs increased much more rapidly than inflation. Therefore, the answer is B.

Question 13

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.

Accepted Answer

The answer of The ratio Price Level in Earlier Time)...

Question 14

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.

Accepted Answer

The answer of If the price index in 1922 was...

Question 15

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.

Accepted Answer

To adjust for inflation, we need to use the formula:
Inflation-adjusted price = (Price in the past / Price index in the past) x Price index in the present

Substituting the values given:
Inflation-adjusted price = (0.05 / 14) x 221 = 0.79

Therefore, the inflation-adjusted price of a Pepis would be about 79 cents.

Question 16

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.

Accepted Answer

We can calculate the inflation rate using the price index as follows:

Inflation rate = (new index/old index) * 100% = (226/184) * 100% = 122.83%

Therefore, tuition and fees have increased by 122.83% over the period. This is higher than the rate of inflation, which means that tuition has increased more rapidly than inflation.

Question 17

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.

Accepted Answer

To calculate the percentage increase in the CPI, we use the formula:

[(CPI in 2013 - CPI in 2012) / CPI in 2012] x 100%

Plugging in the given values, we get:

[(135 - 117) / 117] x 100% = 15.4%

Therefore, we can correctly say that the typical basket of goods was about 15.4 percent more expensive in 2013 than in 2012. Options A and B are incorrect because both options use a percentage change of 18 instead of 15.4. Options D and E are also incorrect because they refer to the average price of all items included in GDP, which is not the same as the CPI.

Question 18

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.

Accepted Answer

To calculate the inflation-adjusted price of the Dr. Wells, we need to multiply its price in 1970 by the ratio of the current CPI to the CPI in 1970:
Adjusted Price = (Price in 1970) x (Current CPI / CPI in 1970)
Adjusted Price = $0.15 x (240 / 37.8)
Adjusted Price = $0.95 (rounded to the nearest penny)

Question 19

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.

Accepted Answer

The answer of The price of a McDonald's hamburger in...

Question 20

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.

Accepted Answer

The price of salt increased from $0.30 to $0.50 over 10 years, which is an increase of $0.20. To find the average annual rate of increase, we calculate ($0.20 / $0.30) / 10 = 0.0667 or about 6.67% per year, which is closest to the 5 percent rate per year option.

Quiz 8: The Price Level and Inflation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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)

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

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