Deck 25: The Cost of Living

Question 1

When we say the cost of living has gone down,we mean that,looking broadly over a range of goods and services:

A)a dollar buys less today than it used to buy.
B)a dollar buys more today than it used to buy.
C)a dollar buys the same today as it used to buy.
D)our income has increased to match the cost of those goods.

Answer 1

a dollar buys more today than it used to buy.

Question 2

The reason economists create a market basket is:

A)to track its changing prices to reflect changes in the cost of living.
B)to see how the cost of buying the goods and services on the list changes over time.
C)to know how typical consumers are being affected by changing prices.
D)All of these statements are true.

Answer 2

All of these statements are true.

Question 3

Which of the following goods is least likely to be in a market basket?

A)A missile
B)A gallon of milk
C)A pair of khaki pants
D)A tank of heating oil

Answer 3

A missile

Question 4

A dollar:

A)changes in value over time.
B)can reflect the cost of living in terms of the goods it can purchase.
C)has no worth itself,but represents goods we can buy with it.
D)All of these statements are true.

Question 5

Which of the following goods is least likely to be in a market basket?

A)Helicopter
B)Gasoline
C)Barbie dolls
D)Breakfast cereal

Question 6

The consumer price index is calculated by:

A)the Bureau of Labor Statistics.
B)the Congressional Budget Office.
C)the National Bureau of Economic Research.
D)the Social Security Office.

Question 7

The "urban consumers" that the CPI is based on includes:

A)anyone living in a city of 2,500 or more.
B)anyone living in a city of 5,000 or more.
C)anyone living in a city of 10,000 or more.
D)anyone living in a city of 15,000 or more.

Question 8

A market basket:

A)looks like a really long shopping list.
B)includes specific goods and services in fixed quantities that roughly correspond to a typical consumer's spending.
C)includes housing,food,clothing,and transportation.
D)All of these statements are true.

Question 9

The market basket approach:

A)gives us a single number that represents how changing prices affect the typical consumer.
B)gives us a list of what the typical consumer buys and the average price change of those goods.
C)tells us how the prices of all goods and services in an economy change over time.
D)All of these statements are true.

Question 10

The consumer price index:

A)measures the increase in the cost of the market basket relative to the cost in a given base year.
B)is always 100 in the base year.
C)helps us understand how the cost of living today compares with the cost of living at some time in the past.
D)All of these statements are true.

Question 11

The market basket approach:

A)measures changes in the cost of your shopping basket,assuming that you buy the same items in the same quantities.
B)gives us a single number to measure how much your total costs rise over time.
C)makes a lot more sense than simply averaging the increase in the price of each grocery item.
D)All of these statements are true.

Question 12

Suppose the base year of the CPI is 2010,and the CPI calculated for 2012 was 102.What is the correct interpretation of this number?

A)Average prices in the economy have increased by 102 percent since 2010.
B)Average prices in the economy have increased by 4 percent since 2010.
C)The cost of living for a typical consumer is 2 percent higher than it was in 2010.
D)The average goods of consumers has risen an average of 2 percent from 2010 to 2012.

Question 13

A price index:

A)measures how much the cost of a market basket has risen or fallen relative to the cost in a base time period or location.
B)summarizes the changes in the cost of living.
C)allows us to see clearly the changes in the cost of a market basket over time or across different locations.
D)All of these statements are true.

Question 14

When the market basket is tracked over time:

A)the goods within the basket remain the same,so only changing prices are captured.
B)the goods within the basket reflect the typical consumer each year,so it captures how consumers are affected each year.
C)the goods within the basket reflect the typical consumer each year,but prices are held constant,so it captures if we are consuming more or less as an economy.
D)None of these statements is true.

Question 15

When we say the cost of living has gone up,we mean that,looking broadly over a range of goods and services:

A)a dollar buys less today than it used to buy.
B)a dollar buys more today than it used to buy.
C)a dollar buys the same today as it used to buy.
D)our income has increased to match the cost of those goods.

Question 16

By using the market basket approach:

A)it allows us to see how your cost of living is affected by the changing prices of different goods relative to how much of each good you buy.
B)we get a more accurate picture of the changing cost of living than by simply averaging the changing prices of goods listed in the market basket.
C)we get a clearer picture of the changing cost of living than by averaging the changing prices of all goods and services produced.
D)All of these statements are true.

Question 17

Which of the following goods is least likely to be in a market basket?

A)Shuttle service
B)Airfare
C)Streetlamps
D)Coffee beans

Question 18

A dollar's value can change:

A)over time.
B)across different locations.
C)Both of these statements are true.
D)Neither of these statements is true.

Question 19

A market basket:

A)is a tool devised to track how changing prices affect consumers.
B)includes all the goods and services produced in an economy.
C)includes all the goods and services consumed in an economy,including imports.
D)includes all the goods and services consumed in an economy,including net exports.

Question 20

The most commonly used price index to track changes in prices for the typical household in the U.S.is:

A)consumer price index.
B)basket price index.
C)retail price index.
D)producer price index.

Question 21

The CPI basket of goods represents those goods and services purchased by urban consumers because:

A)it represents 87 percent of our population.
B)it represents over 90 percent of our population.
C)it represents 78 percent of our population.
D)it represents 60 percent of our population.

Question 22

When the CPI increases from one year to the next:

A)the cost of living has increased.
B)inflation has occurred.
C)people need to spend more money to buy the same amount of goods as the previous year.
D)All of these statements are true.

Question 23

The consumers that the CPI is based on does not include:

A)retired persons.
B)persons living in rural areas.
C)unemployed persons.
D)The CPI does not include any of these.

Question 24

The substitution by consumers of one good for another because of relative price changes:

A)is not captured by the CPI and causes the CPI to overestimate the cost-of-living changes.
B)is captured by the CPI and causes the CPI to overestimate the cost-of-living changes.
C)is not captured by the CPI and causes the CPI to underestimate the cost-of-living changes.
D)is captured by the CPI and causes the CPI to underestimate the cost-of-living changes.

Question 25

The consumers that the CPI is based on includes:

A)"urban consumers."
B)professors.
C)unemployed persons.
D)All of these are included.

Question 26

Core inflation is measured because:

A)food and energy costs fluctuate frequently and can distort actual changes in the cost of living.
B)the prices of retail consumption items fluctuate frequently and can distort actual changes in the cost of living.
C)the prices of nondurable goods fluctuate more frequently than the prices of durable goods;therefore,removing them from the basket prevents potential distortion.
D)the prices of durable goods fluctuate more frequently than the prices of nondurable goods;therefore,removing them from the basket prevents potential distortion.

Question 27

The consumers that the CPI is based on includes:

A)institutionalized persons.
B)incarcerated persons.
C)persons in the military.
D)The CPI does not include any of these.

Question 28

Headline inflation:

A)measures the changes in prices for the entire market basket of the average urban consumer.
B)is inflation measured using the producer price index.
C)measures price changes with food and energy costs taken out of the basket.
D)is inflation measured using the retail price index.

Question 29

The consumers that the CPI is based on does not include:

A)the unemployed.
B)the retired.
C)persons in prison.
D)The CPI does not include any of these.

Question 30

Product innovation:

A)presents a problem for those calculating the CPI because they use a fixed basket of goods.
B)causes the basket of goods to inaccurately reflect the popularization of these goods.
C)can cause the CPI to be underestimated.
D)All of these statements are true.

Question 31

The substitution of one good for another by consumers:

A)due to price changes is captured by the CPI.
B)due to changes in tastes/preferences is captured by the CPI.
C)The substitution of one good for another for whatever reason is captured by the CPI.
D)The substitution of one good for another for whatever reason is not captured by the CPI.

Question 32

As new goods and services become available:

A)the basket of goods used to calculate the CPI immediately changes to reflect them.
B)the basket of goods used to calculate the CPI doesn't change until 75 percent of urban consumers use it.
C)the basket of goods used to calculate the CPI never changes to reflect them.
D)None of these statements is true.

Question 33

One problem with keeping the CPI basket fixed is:

A)it doesn't accurately isolate price changes from behavior changes.
B)it doesn't allow for changes in people's preferences over time.
C)it can't properly predict when prices will change.
D)None of these is a problem related to keeping the CPI basket fixed.

Question 34

The CPI is based on:

A)an average of the goods and services purchased by "urban consumers."
B)an average of the goods and services purchased by "rural consumers."
C)an average of the two baskets of goods and services purchased both by "urban" and by "rural" consumers.
D)an aggregated average meant to reflect the statistical average consumption.

Question 35

In an attempt to separate the quality changes from price changes of a product over time,the BLS does a:

A)hedonic quality adjustment.
B)heterogenic quality adjustment.
C)qualitative price change.
D)qualitative market adjustment.

Question 36

The consumers that the CPI is based on includes:

A)bank tellers.
B)greeters at Walmart.
C)retired persons.
D)All of these are included.

Question 37

The inflation rate is:

A)the percentage change in the overall price level.
B)one of the central concepts in macroeconomics.
C)a measure of the rate of increase in the cost of living.
D)All of these statements are true.

Question 38

The CPI attempts to:

A)balance out the consumption of different types of people in different life stages.
B)balance out the consumption of different types of people in different life situations.
C)capture an average across a very large group of U.S.consumers.
D)All of these statements are true.

Question 39

When the CPI increases from one year to the next:

A)inflation has occurred.
B)deflation has occurred.
C)there has not been a change in the overall price level.
D)the impact to the general standard of living is hard to measure.

Question 40

Core inflation:

A)measures the changes in prices for the entire market basket of the average urban consumer.
B)is inflation measured using the producer price index.
C)measures price changes for the market basket of the average urban consumer with food and energy costs taken out.
D)is inflation measured using the retail price index.

Question 41

In practice,the three measurements of inflation,the CPI,PPI,and GDP deflator:

A)all closely track each other.
B)are all positively correlated.
C)all measure inflation,but focus on different parts of the economy.
D)All of these statements are true.

Question 42

When someone tells you they made $17,000 in 1970:

A)it is difficult to tell from that number if the person was well off or not,because prices have changed so much since then.
B)the income should be adjusted into current dollars to clearly understand what that salary is "worth" in terms of purchasing power.
C)it is a nominal figure that is hard to understand.A real figure would be more helpful.
D)All of these statements are true.

Question 43

Any basket of goods that is missing food and energy items:

A)is missing a large portion of consumption.
B)is missing a small portion of a typical consumer's basket.
C)is a useless calculation.
D)is called the retail sales index.

Question 44

A good that is most likely to be in the producer price index is:

A)industrial machinery.
B)light trucks.
C)soft lumber.
D)All of these are in the PPI.

Question 45

A good that is most likely to be in the producer price index is:

A)light trucks.
B)gasoline.
C)passenger cars.
D)All of these are in the PPI.

Question 46

Because increases in input prices eventually make it to consumers when they buy the final product,the PPI:

A)is considered a good predictor of future consumer prices.
B)is a lag variable for inflation.
C)accounts for inflation before it reaches consumers,adjusting the CPI downward.
D)accounts for inflation before it reaches consumers,adjusting the CPI upward.

Question 47

We calculate many different kinds of price indexes:

A)in order to capture a complete picture of how price changes are affecting the economy.
B)to see how the prices of different groups of goods are changing.
C)to measure how different groups of people in the economy are being affected by changing prices.
D)All of these statements are true.

Question 48

The producer price index is considered a good predictor of future consumer prices because:

A)increases in input prices eventually make it to consumers when they buy the final product.
B)increases in input prices are accounted for in PPI,and therefore this automatically adjusts the CPI.
C)increases in input prices are observed first in the PPI,adjusting the CPI downward.
D)None of these statements is true.

Question 49

In 1976,the cost of a movie was $4.In 2012,it's $9.If the CPI for 1976 is 56,and 228 for 2012,then we could say the cost of a 1976 movie in 2012 would be:

A)$16.29,so the cost of movies has not increased as much as general inflation.
B)$16.29,so the cost of movies is relatively more in 2012 than it was in 1976.
C)$2.21,so the cost of movies has not increased as much as general inflation.
D)$2.21,so the cost of movies is relatively more in 2012 than it was in 1976.

Question 50

Suppose we want to know how much money your grandparents would have to earn now to have purchasing power equivalent to their income in 1969.We could:

A)translate their nominal income in 1969 into constant,real dollars of today.
B)translate their nominal income today into 1969 dollars.
C)take a ratio of their income today with their income from 1969.
D)None of these statements is true.

Question 51

Inflation is measured by examining the percent increase in the ________ from one year to the next.

A)CPI
B)PPI
C)GDP deflator
D)Inflation is measured as the percentage increase of any index,regardless of the index used.

Question 52

The GDP deflator differs from the CPI in its measurement of inflation in that:

A)it measures the price changes of all goods,not just those in a typical consumer's basket.
B)it uses the total quantities that are produced,not the ratio of what a typical consumer might consume.
C)it does not include imports,which may have a real effect on the typical consumer's cost of living.
D)All of these statements are true.

Question 53

The GDP deflator:

A)measures price changes for everything produced in the country.
B)doesn't include goods produced abroad.
C)is computed using the quantities that are produced in the economy each year.
D)All of these statements are true.

Question 54

The price index that measures the prices of goods and services purchased by firms is called the:

A)PPI.
B)CPI.
C)RPI.
D)PRI.

Question 55

A good that is most likely to be in the producer price index is:

A)gasoline.
B)apples.
C)books.
D)All of these are in the PPI.

Question 56

Regardless of the index we use:

A)inflation is measured as a percent increase in the index from one year to the next.
B)we get the same measurements for inflation,so each is equally useful.
C)the measurement of inflation is the same,so we use the one easiest to calculate.
D)All of these statements are true.

Question 57

The price index that measures the prices of goods and services purchased by firms is called the:

A)producer price index.
B)purchasing power index.
C)consumer price index.
D)retail sales index.

Question 58

The real value of any variable is:

A)its nominal value adjusted for inflation.
B)its nominal value holding the base constant.
C)its nominal value holding the quantity constant.
D)its nominal value hold the basket constant.

Question 59

We translate nominal income in any past year into constant,real dollars to:

A)allow us to compare changes in purchasing power over time.
B)see what an income we were earning in the past would be equivalent to today.
C)understand what a salary in the past would equal in current dollars to determine how much more we have actually gained in purchasing power.
D)All of these statements are true.

Question 60

While the CPI focuses on changes to prices for consumers,the PPI:

A)measures the prices of goods and services purchased by firms.
B)stands for the producer price index.
C)looks specifically at the prices changes that affect the typical producer.
D)All of these statements are true.

Question 61

One fundamental idea in macroeconomics about inflation is:

A)if all prices rise,then inflation doesn't really affect anyone's purchasing power.
B)when all prices rise,inflation occurs and everyone is worse off.
C)keeping prices constant is the only way to ensure increasing purchasing power over time.
D)if all prices decline,the purchasing power of everyone declines.

Question 62

Just as indexing allows us to compare the cost of living across different periods of time,the ____________ is used to allow us to compare the cost of living across different locations.

A)consumer purchasing index
B)purchasing power index
C)producer purchasing index
D)retail power parity

Question 63

In 1976,the cost of a movie was $4.In 2012,it's $9.If the CPI for 1976 is 56,and 228 for 2012,to find the real 2012 value of a 1976 movie,we would multiply its nominal value in 1976 by the ratio of:

A)(56/228).
B)(228/56).
C)(9/5).
D)(5/9).

Question 64

Cost-of-living adjustments are:

A)indexed payments.
B)not common in the U.S.
C)used to automatically keep the real value of salaries or other payments constant,without having to renegotiate contracts or pass new laws.
D)All of these statements are true.

Question 65

When something is indexed:

A)its value is automatically adjusted in proportion to the cost of living.
B)it is expressed as nominal value multiplied by price index.
C)its real value is converted into nominal terms for comparison.
D)its relative rank in consumption items is compensated for relative to its cost.

Question 66

Social Security payments:

A)began to be indexed to inflation in 1975.
B)are now indexed using the CPI.
C)are adjusted using COLAs.
D)All of these statements are true.

Question 67

Inflation:

A)hurts everyone in the economy whenever it occurs.
B)hurts everyone in the economy the same.
C)always decreases purchasing power.
D)has very real costs associated with it.

Question 68

Social Security payments:

A)now hold their value over time.
B)are adjusted for inflation using the CPI.
C)undergo cost-of-living adjustments.
D)All of these statements are true.

Question 69

Social Security payments:

A)were not indexed to adjust for inflation until 1940.
B)were not indexed to adjust for inflation until 1968.
C)were not indexed to adjust for inflation until 1975.
D)were not indexed to adjust for inflation until 1980.

Question 70

Social Security payments:

A)continue to cause the elderly to lose income over time,since payments are not adjusted for inflation.
B)cause concern for Congress,due to the increase in life expectancies.
C)now hold their real value.
D)None of these statements is true.

Question 71

Inflation:

A)doesn't necessarily harm purchasing power.
B)always decreases purchasing power.
C)always increases purchasing power.
D)should try to be avoided at all costs.

Question 72

Now that Social Security payments are indexed:

A)the nominal value is adjusted to maintain a constant real value.
B)the real value is adjusted to maintain a constant nominal value.
C)the payments are adjusted so retirees can buy more with their payments over time.
D)the payments are not adjusted enough,so retirees can buy less with their payments over time.

Question 73

Social Security checks began to be issued in:

A)1920.
B)1930.
C)1940.
D)1950.

Question 74

When Social Security checks were first issued:

A)the nominal amount stayed the same for the life of the payments.
B)the nominal amount was regularly increased by 5 percent every 3 months.
C)the nominal amount was regularly increased by 10 percent every 3 years.
D)the nominal amount was regularly increased by 3 percent every 5 years.

Question 75

Ida May Fuller was the first person to:

A)receive a Social Security check.
B)have her Social Security check adjusted for inflation.
C)receive Social Security payments for over 20 years.
D)petition Congress for indexing Social Security payments.

Question 76

Until Congress began to periodically raise benefit levels to adjust for inflation,the first recipients of Social Security checks:

A)lost value over time,because the payments were not adjusted for inflation.
B)received a fixed amount that caused their real income to decline.
C)grew poorer over time,because the payments were nominal amounts.
D)All of these statements are true.

Question 77

COLA stands for:

A)cost-of-living adjustment.
B)cost-of-living aggregate.
C)capital operations leasing adjustment.
D)capital operations leasing agreement.

Question 78

Social Security payments:

A)were not originally adjusted for inflation,causing the real value to retirees to increase over time.
B)were not originally adjusted for inflation,causing the real value to retirees to decrease over time.
C)were originally adjusted for inflation,causing the real value to retirees to increase over time.
D)were originally adjusted for inflation,causing the real value to retirees to decrease over time.

Question 79

Indexing Social Security payments is done using:

A)the CPI.
B)the PPI.
C)the GDP deflator.
D)the RPI.

Question 80

Indexing Social Security payments:

A)no longer requires a concerted effort on the part of Congress to maintain their real value.
B)still requires a concerted effort on the part of Congress to vote the amount of increase.
C)no longer requires a concerted effort on the part of Congress to maintain their nominal value.
D)still requires a concerted effort on the part of Congress to convert them to their nominal amounts.