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.

Accepted Answer

The inflation rate is calculated as ((121 - 110) / 110) * 100 = 10 percent, not 11 percent.

Question 2

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

Accepted Answer

Both the GDP deflator and the Consumer Price Index (CPI) are used to measure inflation, but they do so from different perspectives. The GDP deflator measures the price changes of all domestically produced goods and services, while the CPI measures the price changes of a basket of goods and services purchased by households.

Question 3

The CPI is always 1 in the base year.

Accepted Answer

The CPI is set to 100 in the base year, not 1.

Question 4

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

Accepted Answer

The Bureau of Labor Statistics reports the Consumer Price Index (CPI) on a monthly basis, not weekly.

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.

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. By keeping the basket of goods and services constant, the CPI specifically aims to measure the effect of price changes on consumer expenses, isolating these from changes in the quantity or quality of goods and services consumed.

Question 6

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

Accepted Answer

The consumer price index (CPI) is used to monitor changes in the cost of living over time, reflecting the prices of goods and services purchased by households.

Question 7

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

Accepted Answer

A CPI (Consumer Price Index) of 90 indicates that the price level has decreased by 10 percent from the base year, as the index is calculated with the base year set at 100.

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.

Accepted Answer

The Consumer Price Index (CPI) is calculated by taking the price of a basket of goods and services in the current year, dividing it by the price of the same basket in the base year, and then multiplying the result by 100 to convert it into an index number.

Question 9

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

Accepted Answer

Inflation refers to the increase in the prices of goods and services across an economy, indicating a rise in the overall price level.

Question 10

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

Accepted Answer

The base year for the Consumer Price Index (CPI) is not always the first year among the years being considered; it is a year chosen for comparison and can be any year against which the change in price level is measured.

Question 11

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

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, thus reflecting the overall cost of goods and services bought by a typical consumer.

Question 12

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

Accepted Answer

The Bureau of Labor Statistics is an agency within the U.S. Department of Labor that collects and analyzes essential labor economic data in the United States.

Question 13

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

Accepted Answer

The inflation rate reported in the news is usually calculated from the Consumer Price Index (CPI), not the GDP deflator. The CPI measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services, making it more directly relevant to everyday consumer experiences.

Question 14

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

Accepted Answer

A falling Consumer Price Index (CPI) indicates that prices on average are decreasing, meaning a family can maintain their standard of living for less money as their purchasing power increases.

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.

Accepted Answer

This formula correctly calculates the inflation rate for 2007 by comparing the Consumer Price Index (CPI) of 2007 to that of 2006, showing the percentage change in prices from one year to the next.

Question 16

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

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. A CPI of 140 means that the price level has increased by 40% from the base year (when the CPI is set to 100).

Question 17

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

Accepted Answer

The inflation rate is the percentage change in the price level from the previous period, not the absolute change.

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.

Accepted Answer

The Consumer Price Index (CPI) specifically measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services, making it a more direct measure of the inflation experienced by consumers compared to the GDP deflator, which reflects prices for all domestically produced goods and services. Therefore, CPI is more commonly used as a gauge of inflation from the consumer perspective.

Question 19

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

Accepted Answer

The basket of goods and services used to compute the Consumer Price Index (CPI) is updated periodically, not monthly, to reflect changes in consumer habits and preferences.

Question 20

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

Accepted Answer

The Bureau of Labor Statistics (BLS) determines the importance of prices to the typical consumer by conducting the Consumer Expenditure Survey, which collects information from households and families on their buying habits, income, and demographic characteristics. This data is used to update the market basket of goods and services for the Consumer Price Index (CPI).

Quiz 24: Measuring the Cost of Living