Deck 24: Measuring the Cost of Living

Question 1

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.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

The CPI is always 1 in the base year.

Answer 3

False

Question 4

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

Question 5

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 6

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

Question 7

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

Question 8

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 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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 16

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

Question 17

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

Question 18

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 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

Data from the Bureau of Labor Statistics show that consumer spending on medical care is about equal to consumer spending on housing.

Question 24

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

Question 25

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

Question 26

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 27

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

Question 28

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 29

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 30

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

Question 31

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

Question 32

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 33

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

Question 34

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 35

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

Question 36

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 37

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

Question 38

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 39

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

Question 40

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

Question 41

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

Question 42

The largest sector in the consumer price index market basket is food and beverage purchases.

Question 43

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 44

Consumer price index = (Price of basket of goods and services in current year / Price of basket in base year ) x 100

Question 45

Abjihit deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Abjihit withdraws his $105. If inflation was 7 percent during the year the money was deposited, then Abjihit's purchasing power has increased by 2 percent.

Question 46

Abhijit deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Abhijit withdraws his $105. If deflation was 7 percent during the year the money was deposited, then Abhijit's purchasing power has increased by 12 percent.

Question 47

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 48

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 49

Consumer price index = (Price of basket of goods and services in base year / Price of basket in current year ) x 100

Question 50

The Bureau of Labor Statistics surveys consumers to determine a fixed basket of goods.

Question 51

A COLA automatically raises the wage when the CPI rises.

Question 52

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 53

The GDP deflator reflects the prices of all goods and services produced around the world, whereas the consumer price index reflects the prices of all goods and services bought by consumers.

Question 54

Abjihit deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Abjihit withdraws his $105. If inflation was 5 percent during the year the money was deposited, then Abjihit's purchasing power has not changed.

Question 55

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

Question 56

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 57

Abhijit deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Abhijit withdraws his $105. If deflation was 5 percent during the year the money was deposited, then Abhijit's purchasing power has not changed.

Question 58

Abjihit deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Abjihit withdraws his $105. If inflation was 2 percent during the year the money was deposited, then Abjihit's purchasing power has increased by 3 percent.

Question 59

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

Question 60

When consumer spending is broken down into the major categories of goods and services, the largest single category is spending on transportation.

Question 61

Core CPI is a price index that only looks at the prices of food and energy and ignores the prices of all other goods and services.

Question 62

In comparison to the situation in the late 1970s, the United States experienced lower nominal interest rates and higher real interest rates in the late 1990s.

Question 63

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

Question 64

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

Question 65

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

Question 66

The U.S. economy has never experienced deflation.

Question 67

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

Question 68

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 69

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

Question 70

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 71

In a period of inflation real interest rates will be greater than nominal interest rates.

Question 72

Archie has a savings account at a bank. If he earns 6 percent interest on his account and if there is deflation, then his purchasing power rises by more than 6 percent over the course of a year.

Question 73

Kristine has a savings account at a bank. If the nominal interest rate she earns exceeds the rate of inflation, then her purchasing power increases over time.

Question 74

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

Question 75

​The PPI is a price index that measures the cost to consumers of a typical basket of goods sold by firms.

Question 76

It is possible to observe a positive nominal interest rate together with a negative real interest rate.

Question 77

The real interest rate measures the change in dollar amounts.

Question 78

Price indexes allow comparisons of dollar figures over time and provide us a sense of how the economy is changing.

Question 79

Persistent increases in the overall level of prices have been the norm.

Question 80

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