Question 1

As a measure of inflation, the media gives more attention to the GDP deflator than the consumer price index.

Accepted Answer

The consumer price index is the more widely recognized measure of inflation by both the media and the general public. The GDP deflator is a less commonly used measure of inflation that is typically only important to economists and policymakers.

Question 2

Disinflation is a decline in overall prices throughout the country.

Accepted Answer

Disinflation refers to a slowdown in the rate of inflation, meaning prices are still rising but at a slower pace, not a decline in overall prices.

Question 3

The price level is the absolute level of a price index, such as the consumer price index.

Accepted Answer

The price level is indeed the absolute level of a price index, such as the consumer price index.

Question 4

A cost-of-living index measures the amount of expenditures needed to maintain a certain standard of living, while a cost-of-goods index measures the amount of expenditures needed to purchase a given basket of goods.

Accepted Answer

This is a correct statement about the difference between a cost-of-living index and a cost-of-goods index.

Question 5

Your employer uses an escalator clause to determine your raise each year. In an inflationary environment, your employer is more likely than you are to want to use the chained CPI for urban consumers as the price index in this clause.

Accepted Answer

Employers may prefer the chained CPI because it typically shows a lower rate of inflation than the traditional CPI, potentially resulting in smaller wage increases.

Question 6

Inflation hurts individuals with fixed interest rate mortgages.

Accepted Answer

Inflation benefits individuals with fixed interest rate mortgages because their mortgage payments remain constant while their wages and the value of the property likely increase, effectively reducing the real cost of their mortgage over time.

Question 7

The household survey focuses on the payrolls of businesses and government agencies.

Accepted Answer

The household survey collects data on individuals and households, rather than businesses and government agencies. It is used to measure unemployment and other labor market indicators.

Question 8

The chained consumer price index (CPI) for urban consumers takes less time to estimate than does the CPI.

Accepted Answer

The chained CPI takes more time to estimate because it accounts for changes in consumer spending patterns and substitution between items, requiring more complex calculations than the traditional CPI.

Question 9

The producer price index measures the average changes in the prices received by domestic producers for their output.

Accepted Answer

The statement is correct. The producer price index (PPI) is a measure of inflation that tracks the changes in prices received by producers for their goods and services. It is calculated by measuring the average change in prices for a basket of goods and services sold by producers over time.

Question 10

The GDP deflator is a measure of the average change in prices for all goods and services in the economy.

Accepted Answer

The GDP deflator is a measure of inflation that reflects the average change in prices for all goods and services produced in an economy. It is used as an indicator for the overall level of prices in the economy and is calculated by dividing nominal GDP by real GDP and multiplying by 100.

Question 11

The nominal value of wages explains how much a consumer can pay for goods and services.

Accepted Answer

The nominal value of wages refers to the actual dollar amount received by an employee, without adjusting for inflation or any other factors. It does not specifically indicate how much a consumer can pay for goods and services.

Question 12

The consumer price index measures the average change in prices received by domestic producers for their output.

Accepted Answer

The consumer price index measures the average change in prices paid by urban consumers for a fixed basket of goods and services.

Question 13

The consumer price index is a cost-of-goods measure, not a true cost-of-living measure.

Accepted Answer

The consumer price index (CPI) measures the changes in the prices of goods and services purchased by households, which makes it a cost-of-goods measure. It does not take into account all aspects of the cost of living, such as changes in housing costs, taxes, and other expenses.

Question 14

The consumer price index is a cost-of-living index.

Accepted Answer

The Consumer Price Index (CPI) measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services, while a cost-of-living index would measure changes over time in the amount that consumers need to spend to reach a certain utility level or standard of living.

Question 15

The consumer price index is a measure of the changes in the cost of production.

Accepted Answer

The consumer price index (CPI) is a measure of the changes in the price of goods and services purchased by consumers, not the cost of production. It is used as an indicator of inflation or deflation.

Question 16

If the consumer price index (CPI) says that inflation equaled 10% last year, then the chained CPI for urban consumers is likely to say that inflation equaled 9.7% last year.

Accepted Answer

The chained CPI often reports a lower inflation rate than the traditional CPI because it accounts for changes in consumer behavior, such as substituting cheaper goods when prices rise.

Question 17

The GDP deflator is the narrowest of our measures of inflation.

Accepted Answer

The GDP deflator is a broad measure of inflation that reflects the prices of all goods and services produced domestically, unlike narrower measures like the Consumer Price Index (CPI) which only considers consumer goods and services.

Question 18

The chained consumer price index (CPI) for urban consumers does a better job in approximating the cost-of-living index than does the CPI.

Accepted Answer

The chained CPI accounts for changes in consumer behavior and substitution between goods when prices change, making it a closer approximation to the cost-of-living index compared to the traditional CPI.

Question 19

During a deflationary period, prices will increase at a decreasing rate.

Accepted Answer

During a deflationary period, prices will actually decrease, not increase.

Question 20

The consumer price index measures private goods as well as public goods.

Accepted Answer

The Consumer Price Index (CPI) primarily measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services, focusing on private goods and services. Public goods, which are non-excludable and non-rivalrous, and typically provided by the government without direct charges to consumers, are not directly measured by the CPI.

Quiz 6: Measuring Inflation and Unemployment