Question 1

If your nominal wage rises but you think that it automatically means your real wage rose, then you are
A) suffering from money illusion.
B) experiencing the substitution effect.
C) suffering from the heterogeneity illusion effect.
D) experiencing the income effect.
E) suffering from the price confusion problem.

Accepted Answer

Money illusion occurs when individuals mistake changes in nominal prices or wages for changes in real prices or wages. A rise in nominal wage does not necessarily mean a rise in real wage if prices have also risen.

Question 2

Joe Kowalski invents a new product, and this new product becomes cheaper over time. This can be problematic because
A) the consumer price index CPI) will include Joe's new product immediately if it is a consumer good, but as a consumer good, it will not be included in the gross domestic product GDP) deflator.
B) the percent change in the consumer price index CPI) will be distorted, but the change in the gross domestic product GDP) deflator will not be, regardless of whether the product is a consumer good or a producer good.
C) it is unlikely the consumer price index CPI) will include Joe's new product immediately, even if it is a consumer good.
D) money illusion will cause consumers to buy more of this good than the consumer price index CPI) would otherwise reflect.
E) this good might be produced in a geographic location that is not included in the consumer price index CPI).

Accepted Answer

The consumer price index (CPI) often does not include new products immediately, even if they are consumer goods, because the CPI measures changes over time in the price level of a market basket of consumer goods and services purchased by households. New products may take time to be considered significant enough to be included in this basket.

Question 3

Let's say a company invents a very popular device called a Zorgon, which allows you to send small items via a transporter from one place to another. This would affect the consumer price index CPI) in the sense that the CPI
A) would fail to include purchases of the Zorgon for some period of time after the product entered the market.
B) would overstate the cost of the Zorgon because the price would fall over time but the CPI would always be "catching up" and be behind the price decreases.
C) would take into account substitution between the Zorgon and the use of shipping services such as FedEx and UPS as the relative price of these changed.
D) would fail to take into account the quality of the Zorgon.
E) always accurately measures the cost of living.

Accepted Answer

The answer of Let's say a company invents a very...

Question 4

If your real wage rose but your nominal wage fell, this would imply that
A) inflation is positive but less than the rate of increase in your wage.
B) inflation has occurred.
C) your boss took some of your wages illegally.
D) the overall price level has fallen more than your nominal wage.
E) housing prices have fallen, and because you own a house, it reduces the value of your real wage.

Accepted Answer

A rise in real wage means that your purchasing power has increased, which implies that your nominal wage has increased by more than the rate of inflation. If your nominal wage fell but your real wage rose, it means that the overall price level has fallen more than your nominal wage. This can happen during deflation, when prices are falling across the economy, but your wages have fallen at a slower rate than prices.

Question 5

In Las Vegas, the cost of living index is 110, and in San Francisco, it is 170. You work in Las Vegas currently and your salary is $57,000. You are offered a promotion and pay raise of $70,000 to move to San Francisco. If you take the promotion
A) your nominal wage and your real wage have increased.
B) your nominal wage increased but your real wage has decreased.
C) your nominal wage decreased but your real wage has increased.
D) both your nominal and real wage have decreased.
E) your real wage remained constant even though your nominal wage rose.

Accepted Answer

The cost of living index is higher in San Francisco compared to Las Vegas, meaning that the same goods and services in San Francisco are more expensive than in Las Vegas. Therefore, if you move to San Francisco and earn a higher nominal wage of $70,000, your real wage could actually decrease because the cost of living is also higher. To determine the real wage, we need to adjust the nominal wage based on the cost of living index:

Real wage in Las Vegas = Nominal wage / Cost of living index = $57,000 / 110 = $518.18 per index point
Real wage in San Francisco = Nominal wage / Cost of living index = $70,000 / 170 = $411.76 per index point

Comparing the two real wages, we can see that the real wage in San Francisco is lower than in Las Vegas, even though the nominal wage is higher. Therefore, the correct choice is B.

Question 6

Usually in the United States and other advanced economies
A) your real wage is more than your nominal wage.
B) your nominal wage is more than your real wage.
C) your real wage is the same as your nominal wage.
D) inflation increases the value of your real wage.
E) deflation usually occurs.

Accepted Answer

In advanced economies, inflation is typically present and causes the prices of goods and services to increase over time. This means that the purchasing power of a nominal wage decreases, resulting in a lower real wage. Therefore, option B is correct as your nominal wage is typically higher than your real wage.

Question 7

In Country Z, the prices of goods are measured on an annual basis on the last day of the year. In Country Y, the prices of goods are measured on a weekly basis every Wednesday. Comparing the two countries based on this information,
A) Country Y more accurately combats the upward bias of its price index by using a chained index.
B) Country Z more accurately combats the upward bias of its price index by using a chained index.
C) Country Z will experience hyperinflation.
D) Country Y will experience hyperinflation.
E) neither country has a very good price index if consumer purchasing habits change; a chained index usually outperforms a traditional index.

Accepted Answer

The answer of In Country Z, the prices of goods...

Question 8

You are offered two jobs, one in Richmond, Virginia, paying $67,000, and one in San Diego, California, paying $79,000. The price index in Richmond is 104.5; in San Diego it is 132.3. If real wages are the only consideration, then you would
A) be indifferent between the two jobs because the real wages would be about the same within 2 percent).
B) definitely take the job in Richmond because the real wage is higher there.
C) definitely take the job in San Diego because the real wage is higher there.
D) likely take the job in Richmond because there is a Federal Reserve bank there and it would control inflation in the area.
E) likely take the job in San Diego, because better weather is directly correlated to real wages.

Accepted Answer

To compare real wages, adjust the nominal wages by the cost of living (price index) for each location. For Richmond: $67,000 / 104.5 * 100 = $64,115.31. For San Diego: $79,000 / 132.3 * 100 = $59,712.12. The real wage is higher in Richmond, making option B correct.

Question 9

The main drawback of the chained consumer price index CPI) compared to the traditional CPI is that the chained CPI
A) only includes final goods and services.
B) is not updated as frequently.
C) is more difficult to calculate.
D) underestimates true inflation.
E) overestimates true inflation.

Accepted Answer

The chained CPI is more complex and difficult to calculate because it takes into account changes in consumer behavior as prices change, unlike the traditional CPI which assumes a fixed basket of goods and services.

Question 10

Inflation is occurring in a nation; the implications) of this is/are
A) that both real and nominal wages are rising.
B) that both real and nominal wages are falling.
C) almost none, because most wages increase at about the same rate as inflation.
D) that holding nominal wages constant, the real wage would rise.
E) that holding nominal wages constant, the real wage would fall.

Accepted Answer

Inflation means that prices are rising, so holding nominal wages constant means that the amount of money earned stays the same while the purchasing power of that money decreases. Therefore, the real wage would fall.

Question 11

Quality changes are
A) easily accounted for in the consumer price index CPI).
B) always included in the consumer price index CPI).
C) included in the gross domestic product GDP) deflator but not the consumer price index CPI).
D) generally included in both the consumer price index CPI) and the gross domestic product GDP) deflator.
E) at least partially adjusted for in the consumer price index CPI).

Accepted Answer

Quality changes are at least partially adjusted for in the consumer price index (CPI). The CPI attempts to measure the changes in the cost of a fixed basket of goods and services over time, so it takes into account quality changes that may affect the price of these items. However, the extent to which quality changes are adjusted for in the CPI may vary depending on the specific goods and services included in the basket.

Question 12

The textbook shows that the inflation-adjusted movie receipts for Titanic released in 1997) were $3,205,455,051 in 2015 and the original receipts were $2,186,772,302. The implication is that
A) prices were about the same in 2015 as in 1997.
B) hyperinflation has occurred since 1997.
C) prices were about one-third lower in 2015 than they had been in 1997.
D) prices were roughly 50% higher in 2015 than they had been in 1997.
E) Titanic was a bad movie at the time of its release but has become more popular over time.

Accepted Answer

The inflation-adjusted movie receipts for Titanic were higher in 2015 ($3,205,455,051) than in 1997 ($2,186,772,302), indicating that prices were roughly 50% higher in 2015 than they had been in 1997. This suggests that there has been some level of inflation over that time period.

Question 13

In a particular nation, people buy a completely unique and different set of goods and services every year. None of the goods purchased in the new year are the same as any of the goods purchased in the previous year. Based on this information
A) we would know the nation is experiencing inflation.
B) we would know the nation is experiencing deflation.
C) the consumer price index CPI) would be meaningless in this nation.
D) this nation faces a price confusion problem.
E) the relative price of all goods would determine the consumer price index CPI).

Accepted Answer

The consumer price index (CPI) is calculated based on the prices of a fixed basket of goods and services. If the basket of goods and services purchased changes completely every year, then the CPI would not be meaningful as it would be comparing prices of different baskets of goods and services. Thus, choice C is the correct answer. Choices A, B, D, and E are all incorrect as they do not accurately reflect the situation described in the scenario.

Question 14

You are offered two jobs, one in Chicago paying $67,000 and one in Dallas paying $58,000. The price index in Chicago is 110.8, and in Dallas it is 91.5. If real wages are the only consideration, then you would
A) be indifferent between the two jobs because the real wages would be about the same within 2 percent).
B) definitely take the job in Chicago because the real wage is higher there.
C) definitely take the job in Dallas because the real wage is higher there.
D) suffer from money illusion and be conflicted.
E) suffer from menu costs and be conflicted.

Accepted Answer

To compare real wages, adjust the nominal wages by the price index for each city. For Chicago: $67,000 / 110.8 ≈ $604.87 (in terms of a base index of 100). For Dallas: $58,000 / 91.5 ≈ $633.88. Thus, the real wage is higher in Dallas, making option C correct.

Question 15

If cheeseburgers become more expensive and consumers switch their purchases away from cheeseburgers but the consumer price index CPI) still assumes they buy the same amount, then
A) the CPI will reflect upward bias.
B) the CPI will reflect downward bias.
C) consumers will experience money illusion.
D) consumers will experience a price confusion problem.
E) deflation will occur because consumers no longer buy cheeseburgers.

Accepted Answer

The CPI will reflect upward bias because it is assuming that consumers are still buying the same amount of cheeseburgers even though they are switching their purchases due to the increase in price. This creates an overestimation of the true inflation rate.

Question 16

The chained consumer price index CPI) is a better measure of prices than the traditional CPI because
A) it contains producer prices, not just consumer prices.
B) it adjusts for price changes less frequently but across more goods.
C) it adjusts for price changes more often, especially when new goods are introduced, which is important because new products' prices tend to fall soon after introduction.
D) the chained index is called "chained" because it includes industrial goods that are not included in the traditional CPI.
E) while omitting producer prices, it includes substitution between goods as relative prices change.

Accepted Answer

The answer of The chained consumer price index CPI) is...

Question 17

You are offered two jobs, one in Chicago paying $67,000 and one in Philadelphia paying $79,000. The price index in Chicago is 110.8, and in Philadelphia it is 126.5. If real wages are the only consideration, then
A) you would be indifferent between the two jobs because the real wages would be about the same within 2 percent).
B) you would definitely take the job in Chicago because the real wage is higher there.
C) you would definitely take the job in Philadelphia because the real wage is higher there.
D) you would suffer from money illusion and be conflicted.
E) because there is a direct correlation between the real wage and the nominal wage, the job in Philadelphia is definitely the one to take.

Accepted Answer

To calculate the real wages, we need to divide the nominal wages by the price index and multiply by 100.

Real wage in Chicago = (67,000/110.8) x 100 = $60,470.23
Real wage in Philadelphia = (79,000/126.5) x 100 = $62,451.36

Therefore, the real wage in Philadelphia is higher than in Chicago. Hence, the best choice would be to take the job in Philadelphia.

Question 18

Typically if real wages fall, the quantity demanded of labor rises. If workers agree to 3 percent wage increases for a four-year period and inflation is more than 3 percent, then, based on this information alone,
A) workers will have higher real wages because they get paid more.
B) the quantity demanded of labor will increase, because real wages fell.
C) workers must experience money illusion.
D) the quantity demanded of labor will fall.
E) the demand, but not the quantity demanded, for labor will fall.

Accepted Answer

The answer of Typically if real wages fall, the quantity...

Question 19

The chained consumer price index CPI) tends to be
A) a better measure of prices than the traditional CPI, no matter what the circumstances.
B) a better measure of prices than the traditional CPI, but only if inflation is relatively high.
C) a better measure of prices than the traditional CPI, but only if inflation is relatively low.
D) equally as good as the traditional CPI, under all conditions.
E) a poor measure of prices but better than the gross domestic product GDP) deflator.

Accepted Answer

The chained CPI is generally considered a better measure of prices than the traditional CPI because it accounts for changes in consumer behavior as prices change, making it a more accurate reflection of the cost of living over time.

Question 20

Three accuracy problems with the consumer price index CPI) are
A) the income effect, substitution effect, and money illusion.
B) substitution, quality changes, and the money illusion.
C) price confusion, substitution, and quality changes.
D) substitution, quality changes, and the availability of new goods and services.
E) the availability of new goods and services, substitution, and traditional bundle bias.

Accepted Answer

The correct answer is D) substitution, quality changes, and the availability of new goods and services. These are three well-documented sources of potential inaccuracy in the CPI. Substitution refers to consumers changing their purchasing habits as prices change, which the CPI may not fully capture. Quality changes mean that improvements or deteriorations in product quality may not be accurately reflected in the CPI. The availability of new goods and services poses a challenge for the CPI because it may not immediately incorporate these new options, affecting its accuracy in reflecting the cost of living.

Quiz 8: The Price Level and Inflation

If your nominal wage rises but you think that it automatically means your real wage rose, then you are

Joe Kowalski invents a new product, and this new product becomes cheaper over time. This can be problematic because

Let's say a company invents a very popular device called a Zorgon, which allows you to send small items via a transporter from one place to another. This would affect the consumer price index CPI) in the sense that the CPI

If your real wage rose but your nominal wage fell, this would imply that

In Las Vegas, the cost of living index is 110, and in San Francisco, it is 170. You work in Las Vegas currently and your salary is $57,000. You are offered a promotion and pay raise of $70,000 to move to San Francisco. If you take the promotion

Usually in the United States and other advanced economies

In Country Z, the prices of goods are measured on an annual basis on the last day of the year. In Country Y, the prices of goods are measured on a weekly basis every Wednesday. Comparing the two countries based on this information,

You are offered two jobs, one in Richmond, Virginia, paying $67,000, and one in San Diego, California, paying $79,000. The price index in Richmond is 104.5; in San Diego it is 132.3. If real wages are the only consideration, then you would

The main drawback of the chained consumer price index CPI) compared to the traditional CPI is that the chained CPI

Inflation is occurring in a nation; the implications) of this is/are

Quality changes are

The textbook shows that the inflation-adjusted movie receipts for Titanic released in 1997) were $3,205,455,051 in 2015 and the original receipts were $2,186,772,302. The implication is that

In a particular nation, people buy a completely unique and different set of goods and services every year. None of the goods purchased in the new year are the same as any of the goods purchased in the previous year. Based on this information

You are offered two jobs, one in Chicago paying $67,000 and one in Dallas paying $58,000. The price index in Chicago is 110.8, and in Dallas it is 91.5. If real wages are the only consideration, then you would

If cheeseburgers become more expensive and consumers switch their purchases away from cheeseburgers but the consumer price index CPI) still assumes they buy the same amount, then

The chained consumer price index CPI) is a better measure of prices than the traditional CPI because

You are offered two jobs, one in Chicago paying $67,000 and one in Philadelphia paying $79,000. The price index in Chicago is 110.8, and in Philadelphia it is 126.5. If real wages are the only consideration, then

Typically if real wages fall, the quantity demanded of labor rises. If workers agree to 3 percent wage increases for a four-year period and inflation is more than 3 percent, then, based on this information alone,

The chained consumer price index CPI) tends to be

Three accuracy problems with the consumer price index CPI) are