Deck 8: The Cost of Living

Question 1

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 % since 2010.
B) Average prices in the economy have increased by 1.9 % since 2010.
C) The cost of living for a typical consumer is 2 % higher than it was in 2010.
D) The average goods of all consumers has risen an average of 2 % from 2010 to 2012.

Answer 1

The cost of living for a typical consumer is 2 % higher than it was in 2010.

Question 2

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.

Answer 2

Both of these statements are true.

Question 3

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 final year of measurement.
C) helps us understand why the cost of living today compares with the cost of living at some time in the past.
D) is a perfect measure of how prices change for all goods and services in the economy.

Answer 3

measures the increase in the cost of the market basket relative to the cost in a given base year.

Question 4

A market basket:

A) looks like a really long shopping list for what firm's typically purchase.
B) includes specific goods and services in fixed quantities that roughly correspond to a typical consumer's spending.
C) only includes housing, food, and clothing, but not things like transportation.
D) is what an economist creates in order to understand purchasing trends of households and firms.

Question 5

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 6

The consumer price index is calculated by the:

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

Question 7

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 8

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) tells us exactly how people change what they buy from year to year.

Question 9

By using the market basket approach:

A) it allows us to see how 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 10

According to the table shown, which year is most likely being used for the base year?

A) 2010
B) 2011
C) 2012
D) 2013

Question 11

The reason economists create a market basket is to:

A) track its changing prices to reflect changes in purchasing patterns of firms.
B) see how the cost of buying the goods and services on the list changes over time.
C) know how each individual consumer is being affected by changing prices.
D) get a sense of how people buy items on a weekly basis.

Question 12

The market basket approach:

A) measures changes in the cost of a fixed shopping basket, assuming that typical consumer buys the same items in the same quantities.
B) gives us a single number to measure how much your total costs for all goods and services change over time.
C) is equivalent to simply averaging the increase in the price of each grocery item.
D) is how economists monitor trends in what people like to buy from year to year.

Question 13

When the market basket is tracked over time the goods within the basket:

A) remain the same, so only changing prices are captured.
B) reflect the typical consumer each year, so it captures how consumers are affected each year.
C) 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) remain the same, but some prices are held constant on items that are important to consumers.

Question 14

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) average price index.
C) retail price index.
D) producer price index.

Question 15

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.
B) summarizes the changes in the cost of living for only rural consumers.
C) allows us to see clearly the changes in the cost of a market basket daily.
D) is generally only used with consumer goods and services

Question 16

Which of the following doesn't characterize the properties of 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) it has a fixed value that doesn't change over time.

Question 17

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 18

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 19

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

Question 20

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.

Question 21

According to the table shown, what can be said about the cost of living in 2010?

A) It was lower than in the base year.
B) People experienced a decrease in the cost of living because the CPI is less than 100.
C) People experienced an increase in the cost of living because the CPI isn't over 100.
D) There must have been a recession because the CPI is less than 100.

Question 22

The urban 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 23

The "urban consumers" that the CPI is based on includes anyone living in a city of:

A) 2,500 or more.
B) 50,000 or more.
C) 100,000 or more.
D) 150,000 or more.

Question 24

The urban 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 25

Product innovation:

A) presents a problem for those calculating the CPI because they use a fixed basket of goods.
B) is accurately reflected in the basket of goods.
C) doesn't cause the CPI to be overestimated.
D) is not an issue for the CPI since it uses a fixed basket of goods and services.

Question 26

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 27

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

A) hedonic quality adjustment by estimating what the price of the item would be without the improved features.
B) hedonic quality adjustment by estimating the price of similar goods.
C) qualitative price change by estimating the price of all possible brands of the items.
D) qualitative market adjustment by estimating the price of the items in all markets.

Question 28

The urban 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 29

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 30

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

A) over 80 percent of our population.
B) over 90 percent of our population.
C) 78 percent of our population.
D) 60 percent of our population.

Question 31

The consumers that the CPI is based on includes:

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

Question 32

According to the table shown, what can be said about the cost of living in 2012?

A) The typical consumer must spend 5 % more in 2012 than he did in 2011 in order to buy the same goods.
B) Every consumer will experience a 5 % increase in his cost of living from 2011.
C) Whatever consumers bought in 2012 cost 5% more than what they spent in 2011.
D) None of these statements is true.

Question 33

According to the table shown, what happened to the cost of living from 2013 to 2014? The cost of living:

A) increased; consumers became worse off than they would have been if the price level had not changed.
B) decreased; consumers became worse off than they would have been if the price level had not changed.
C) increased; consumers became better off than they would have been if the price level had not changed.
D) decreased; consumers became better off than they would have been if the price level had not changed.

Question 34

According to the table shown, what can be said about the cost of living in 2011?

A) It increased 5.3 % from the previous year, and consumers were worse off if their nominal income did not change.
B) It increased by 5.0 % from the previous year, and consumers were better off if their nominal income did not change.
C) It is the base year, so no comparisons can be made in this year.
D) It is the base year, so the cost of the basket of goods did not change.

Question 35

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

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

Question 36

As new goods and services become available the basket of goods used to calculate the CPI:

A) immediately changes to reflect them.
B) doesn't change until 75 percent of urban consumers use them.
C) never changes to reflect them.
D) periodically is updated in order to reflect the changes.

Question 37

One problem with keeping the CPI basket fixed is it:

A) doesn't accurately isolate price changes from behavior changes.
B) doesn't allow for changes in people's preferences over time.
C) can't properly predict when prices will change.
D) doesn't really capture what a typical household may purchase in a base year.

Question 38

According to the table shown, how do we interpret what happened between 2011 and 2014? The cost of living:

A) increased 6 %.
B) increased 1.06 %.
C) decreased 2 %.
D) decreased 0.98 %.

Question 39

The CPI is based on an:

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

Question 40

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) is captured by the CPI.
D) is not captured by the CPI.

Question 41

Using the information in the table shown, what can be said about the rate of inflation?

A) Deflation occurred before 2007, then inflation occurred.
B) Deflation occurred until 2009, then inflation occurred.
C) Inflation occurred every year from 2005 to 2009.
D) Inflation was the largest from 2005 to 2006.

Question 42

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 43

Using the information in the table shown, the rate of inflation from 2008 to 2009 was:

A) 12.5 %.
B) 11.1 %.
C) 13 %.
D) 17 %.

Question 44

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 price changes that affect the typical producer.
D) All of these statements are true.

Question 45

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

A) industrial machinery.
B) SUV.
C) spaghetti.
D) All of these are in the PPI.

Question 46

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

A) eventually make it to consumers when they buy the final product.
B) are accounted for in PPI, and therefore this automatically adjusts the CPI.
C) are observed first in the PPI, adjusting the CPI downward.
D) are used by consumers to make decisions on what to buy.

Question 47

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

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

Question 48

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 49

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 50

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 51

When the CPI increases from one year to the next:

A) the cost of living has decreased.
B) deflation 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 52

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 53

The inflation rate is:

A) the percentage change in the overall price level.
B) the central concept in microeconomics.
C) a measure of the rate of increase in the cost of imported goods.
D) is not something that can be accurately measured with the CPI.

Question 54

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

A) gasoline.
B) apples.
C) books.
D) None of these would be in the PPI.

Question 55

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) we should get an accurate picture of how all consumer goods and services prices changed from year to year.

Question 56

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

A) CPI
B) price of gas
C) GDP growth
D) nominal GDP

Question 57

Core inflation is measured because the prices of:

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

Question 58

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 59

Using the information in the table shown, the rate of inflation from 2005 to 2006 was:

A) 5.32 %.
B) 5.05 %.
C) 5.00 %.
D) 6.00 %.

Question 60

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 61

Using the information in the table shown, what is the 2009 value of the salary listed in 1979?

A) $127,828
B) $14,643
C) $57,824
D) $504,766

Question 62

In general we note that 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 63

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 64

How can we use the information from the table shown to compare the real value of the 1979 salary to that of the one earned in 2009?

A) You can see that the salary has increased from $43,265 to $170,844.
B) You need to put the 2009 salary into real 2009 terms to compare it to 1979.
C) You need to put both salaries into real dollars in the same year for comparison.
D) There is no real way to compare the two without more information.

Question 65

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 66

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 67

Your father tells you he earned a salary of $45,000 a year in 1980. This salary figure is the:

A) nominal value of his salary in 1980.
B) real value of his salary in 1980.
C) value of his salary adjusted to 2009 dollars.
D) value of his salary adjusted for inflation.

Question 68

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 69

In general we may note that 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 70

One fundamental idea in macroeconomics about inflation is:

A) if all wages 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 71

The GDP deflator:

A) measures price changes for everything produced in the country.
B) may include goods produced abroad.
C) is computed using the quantities that are consumed in the economy each year.
D) is the same as PPI.

Question 72

Using the information in the table shown, what is the 1999 salary in 2009 dollars?

A) $174,136
B) $132,692
C) $105,292
D) $170,844

Question 73

If the 1999 salary in 2009 dollars is $174,136, what can we say about it compared to the 2009 income given in the table shown?

A) Although the nominal salary has increased, the amount of purchasing power has remained the same from 1999 to 2009.
B) The increase in salary from 1999 to 2009 was more than inflation during that period.
C) The 1999 salary could buy more goods and services in 2009 than the 2009 salary could buy.
D) All of these statements are true.

Question 74

Social Security checks began to be issued in:

A) 1929.
B) 1930.
C) 1940.
D) 1955.

Question 75

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 76

If the 1989 salary in 2009 dollars is $147,951, how do we interpret this?

A) The salary earned in 1989 could have purchased the same amount of goods as $147,951 could buy in 2009.
B) It would take $147,951 in 2009 to buy the same amount of goods that was purchased in 1989 with $85,529.
C) Someone earning $85,529 in 1989 would be as well off if he were earning $147,951 in 2009.
D) All of these interpretations are correct.

Question 77

The GDP deflator does not differ from the CPI in its measurement of inflation in that it:

A) measures the price changes of all goods, not just those in a typical consumer's basket.
B) uses the total quantities that are produced, not the ratio of what a typical consumer might consume.
C) does not include imports, which may have a real effect on the typical consumer's cost of living.
D) is the most widely used measure of price level changes for goods and services for consumers.

Question 78

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 79

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 80

The real value of any variable is its nominal value:

A) adjusted for inflation.
B) holding the base constant.
C) adjusting for income.
D) holding the basket constant.