Question 1

If people bought the same market basket of goods as the average consumer again and again:
A) the consumer price index (CPI) would be extremely accurate.
B) the CPI would be less accurate.
C) the gross domestic product (GDP) deflator would be more accurate.
D) the GDP deflator would be less accurate.
E) the CPI would be biased upward relative to the GDP deflator.

Accepted Answer

If people consistently bought the same market basket of goods, the weights used to calculate the CPI would remain constant and the CPI would be extremely accurate in reflecting changes in the prices of those goods over time.

Question 2

Refer to the following figure to answer the next  questions: 
-Based on the figure, one could correctly state that:
A) typically, U.S. inflation was greater than E.U. inflation, with some very brief exceptions.
B) typically, E.U. inflation was greater than U.S. inflation, with some very brief exceptions.
C) there is no consistent relationship between U.S. and E.U. inflation.
D) typically, U.S. and E.U. inflation move together, but E.U. inflation had a much larger variance than that experienced in the United States.
E) typically, U.S. and E.U. inflation move in opposite directions and U.S. inflation had a much larger variance than that experienced by the European Union.

Accepted Answer

Looking at the figure, we can see that typically the E.U. inflation line is above the U.S. inflation line, indicating that the E.U. inflation was greater than U.S. inflation. However, there are some brief periods where the U.S. inflation line is higher than the E.U. line, indicating exceptions.

Question 3

Refer to the following figure to answer the next  questions: 
-As presented in the figure, one could correctly state that:
A) U.S. inflation and E.U. inflation were directly related, but E.U. inflation was generally more than U.S. inflation.
B) U.S. inflation and E.U. inflation were inversely related, but E.U. inflation was generally more than U.S. inflation.
C) U.S. inflation and E.U. inflation were directly related, but U.S. inflation was generally more than E.U. inflation.
D) U.S. inflation and E.U. inflation were inversely related, but U.S. inflation was generally more than E.U. inflation.
E) Both the United States and the European Union experienced deflation from about mid-1980 until about mid-1986.

Accepted Answer

The answer of Refer to the following figure to answer...

Question 4

The percentage change in any economic variable, including the consumer price index (CPI), is measured by which equation?
A) (Previous Year - Current Year √ Previous Year) * 100.
B) (Current Year - Previous Year √ Previous Year) * 100.
C) (Current Year - Previous Year √ Current Year) * 100.
D) Previous Year - Current Year √ Previous Year.
E) Current Year - Previous Year √ Previous Year.

Accepted Answer

The formula to calculate percentage change is (Current Year - Previous Year)/Previous Year x 100. Using algebra, we can simplify this to (Current Year/Previous Year - 1) x 100, which is the same as (Current Year - Previous Year)/Previous Year x 100. Therefore, the correct option is B, as it subtracts the previous year from the current year and then divides it by the previous year, which represents the percentage change.

Question 5

Suppose that the consumer price index of a country was 160 at Year X and 164 at the end of Year Y. What was the country's inflation rate during Year Y?
A) 5%
B) 2.5%
C) 64%
D) 164%
E) 32%

Accepted Answer

To calculate inflation rate, we use the following formula:

Inflation rate = ((CPI Year Y - CPI Year X) / CPI Year X) x 100%

Plugging in the given values:
Inflation rate = ((164 - 160) / 160) x 100% = 2.5%

Therefore, the answer is B.

Question 6

Consider a nation in which the price index last year was 130 and this year it is 150. Which statement is correct?
A) Inflation was 20% this year.
B) Deflation was 20% this year.
C) Housing prices must have risen.
D) Inflation was 38% this year.
E) Deflation was 38% this year.

Accepted Answer

The answer of Consider a nation in which the price...

Question 7

If the goods producers buy change dramatically between years, then:
A) this would be reflected in both the consumer price index (CPI) and the gross domestic product (GDP) deflator.
B) this would not be reflected in either the CPI or the GDP deflator.
C) it would mean the market basket would be automatically updated to reflect the changes.
D) this would be reflected in the GDP deflator but not the CPI.
E) menu costs would fall.

Accepted Answer

The GDP deflator measures changes in the prices of all new goods and services produced in an economy, including those consumed by both producers and consumers. Therefore, if the goods producers buy change dramatically between years, it would be reflected in the GDP deflator but not necessarily in the CPI, which only measures changes in the prices of goods and services purchased by consumers.

Question 8

You know that the consumer price index (CPI) at the beginning of this year was 250 and the rate of inflation was 14%; this would mean:
A) the price of cat food increased by exactly 14%.
B) the CPI at the beginning of last year was 215.
C) the price of dog food probably fell.
D) the CPI at the end of the year was 285.
E) the rate of inflation next year will be more than 14%.

Accepted Answer

The CPI at the end of the year can be obtained by multiplying the initial CPI by (1 + inflation rate) = 1.14. Therefore, the CPI at the end of the year is 250 x 1.14 = 285.

Question 9

In Bovania, milk constitutes 56% of the typical basket of goods for a typical consumer. Let's say the price of milk rises by 7% and the prices of all other goods fall by 4%. Based on the information given, we can definitely say:
A) the consumer price index (CPI) in Bovania is greater than in the previous year.
B) the CPI in Bovania is less than in the previous year.
C) if consumers get a 4% pay raise, they are worse off in terms of their real income compared to inflation as measured by the Bovanian CPI.
D) the gross domestic product (GDP) deflator must be higher than the CPI.
E) the GDP deflator must be less than the CPI.

Accepted Answer

Since the price of milk, which constitutes 56% of the typical basket of goods, rises by 7%, it will have a significant impact on the overall consumer price index (CPI). Even though the prices of all other goods fall by 4%, the rise in milk prices will outweigh this decrease, resulting in a higher CPI. Therefore, we can definitely say that the CPI in Bovania is greater than in the previous year.

Question 10

It is rare when prices fall in modern times. However, it is likely that they would fall during severe recessions. What year is the most likely for this to have occurred?
A) 2005
B) 2009
C) 2011
D) 2012
E) 2003

Accepted Answer

2009 was the year of the Great Recession, during which the global economy experienced a severe contraction. This resulted in a significant decrease in demand, leading to a fall in prices.

Question 11

Refer to the following figure to answer the next  questions: 
-Based on the figure, one could correctly state that:
A) although U.S. inflation was generally higher in the 1970s and 1980s, that situation was reversed in the later years for the European Union.
B) inflation in both the United States and the European Union was higher in the 1990s than it was in the 1970s and 1980s.
C) deflation was a problem in the United States and the European Union in the 1990s, but inflation was a problem for both in the 1970s and 1980s.
D) U.S. and E.U. inflation both tended to be higher in the 1970s and 1980s than in the 1990s.
E) typically, while the European Union had inflation problems, the United States had deflation problems.

Accepted Answer

The figure shows that the inflation rates for both the United States and the European Union were generally higher in the 1970s and 1980s than in the 1990s, thus choice D is the correct statement.

Question 12

Which statement best represents the purpose for measuring annual inflation (or deflation)?
A) The main purpose is to find out how much the price of gasoline has increased from year to year.
B) The main purpose is to find out whether more goods have increased (or decreased) in price compared to the number of goods whose price has decreased (or increased).
C) The main purpose is to find out whether the overall cost of living has changed.
D) The main purpose is to find out whether the economy has produced more goods this year than last year.
E) The main purpose is to find out whether the cost of entertainment is more expensive (or cheaper) this year than last year.

Accepted Answer

The main purpose of measuring annual inflation (or deflation) is to find out whether the overall cost of living has changed. This information is useful for policymakers, businesses, and individuals to make decisions related to budgeting, saving, investing, and pricing of goods and services.

Question 13

In Nation A, the price index rises from 110 to 120 in a particular year. In the same year, the price level rises from 120 to 130 in Nation B. This means:
A) inflation in both nations is 10%.
B) Nation B suffers from hyperinflation.
C) both nations suffer from hyperinflation.
D) Nation A is experiencing inflation but Nation B is experiencing deflation.
E) Nation A is experiencing inflation of less than 9.3% and Nation B is experiencing inflation of less than 8.5%.

Accepted Answer

To calculate the inflation rate, we need to calculate the percent change in the price index. 
For Nation A, the inflation rate is ((120-110)/110)*100 = 9.09%, which is less than 9.3%. 
For Nation B, the inflation rate is ((130-120)/120)*100 = 8.33%, which is less than 8.5%. 
Therefore, both nations are experiencing inflation, but at a rate lower than the given percentages.

Question 14

Refer to the following table to answer the next  questions: 
-As presented in the table, the rate of inflation from 1999-2000 was (rounded to two decimal places):
A) 7.00%.
B) 80.00%.
C) 87.00%.
D) 8.75%.
E) 10.00%.

Accepted Answer

To calculate the inflation rate, we need to use the formula: ((CPI in current year - CPI in previous year) / CPI in previous year) x 100%
From the table, we can see that the CPI in 1999 was 120 and the CPI in 2000 was 130. 
So, the inflation rate from 1999 to 2000 would be ((130-120)/120) x 100% = 8.33% (rounded to two decimal places). 
Therefore, the closest answer choice is D) 8.75%.

Question 15

The concept of a price index is that:
A) it is a measure of how the items included in the typical basket of goods have changed over time; it also includes price changes over time.
B) it is a measure of how the items included in the typical basket of goods have changed over time, while holding price changes constant.
C) it is a measure of how the prices included in the typical basket of goods have changed over time, holding the items in the consumption bundle constant.
D) it is an index of how much gasoline prices have increased, because all prices follow the price of gasoline.
E) it is an index of how much housing prices have changed, because housing is the most important item in the consumption bundle.

Accepted Answer

The answer of The concept of a price index is...

Question 16

In terms of inflation, the period from the mid-1980s until today in the United States is called the "Great Moderation." This refers to the fact that:
A) the hyperinflation rates of 100% or more experienced during the 1960s, 1970s, and 1980s have been replaced by moderate rates of inflation averaging about 12%.
B) the inflation of the 1960s, 1970s, and early 1980s has been replaced by deflation.
C) the deflation of the 1960s, 1970s, and early 1980s has been replaced by moderate inflation (under 10%).
D) the double-digit inflation of the 1970s and 1980s has been replaced by well-controlled inflation of less than 10%.
E) inflation now fluctuates between 0% and 20%, whereas in the 1970s and 1980s, it fluctuated more wildly and at higher rates.

Accepted Answer

The answer of In terms of inflation, the period from...

Question 17

Consider a nation in which the price index was 150 last year and this year it is 130. Which statement is correct?
A) Inflation was 20% this year.
B) Deflation was 20% this year.
C) Housing prices must have fallen.
D) Inflation was 13.33% this year.
E) Deflation was 13.33% this year.

Accepted Answer

Deflation is the decrease in the general price level. In this case, the price index has fallen from 150 to 130, which means that prices, on average, have decreased by (130-150)/150 = -0.1333 or -13.33%. Therefore, the correct answer is E, Deflation was 13.33% this year.

Question 18

Michael Chang buys only tennis rackets during a particular year. During the year in question, the price of all goods rises by 10% on average, but the price of tennis rackets remains the same. Which statement is correct?
A) Michael benefits from inflation.
B) Michael does not experience inflation because he only buys tennis racquets.
C) No matter what Michael buys, he experiences inflation.
D) Michael does not benefit from inflation.
E) We can't conclude anything from the information given.

Accepted Answer

Michael does not experience inflation because the price of tennis rackets remains the same, meaning he does not have to pay more for them despite the overall rise in prices. However, this statement does not imply that Michael benefits from inflation; it only means that he is not affected by it when it comes to buying tennis rackets.

Question 19

Refer to the following figure to answer the next  questions: 
-As presented in the figure, one could correctly state that during the period shown:
A) the United States and the European Union generally experienced periods of both inflation and deflation.
B) generally, the United States experienced deflation, but the European Union experienced inflation.
C) generally, the European Union experienced more deflation than the United States did.
D) there was never a time when either the United States or the European Union experienced deflation.
E) there were brief periods of hyperinflation for both the United States and European Union in the 1970s and early 1980s.

Accepted Answer

The answer of Refer to the following figure to answer...

Question 20

The average inflation rate in the United States from 2000-2012 was about:
A) 20%.
B) 10%.
C) 5%.
D) 2%.
E) -4%.

Accepted Answer

According to data from the Bureau of Labor Statistics, the average inflation rate from 2000-2012 was about 2%.

Quiz 8: The Price Level and Inflation

If people bought the same market basket of goods as the average consumer again and again:

Refer to the following figure to answer the next questions: -Based on the figure, one could correctly state that:

Refer to the following figure to answer the next questions: -As presented in the figure, one could correctly state that:

The percentage change in any economic variable, including the consumer price index (CPI) , is measured by which equation?

Suppose that the consumer price index of a country was 160 at Year X and 164 at the end of Year Y. What was the country's inflation rate during Year Y?

Consider a nation in which the price index last year was 130 and this year it is 150. Which statement is correct?

If the goods producers buy change dramatically between years, then:

You know that the consumer price index (CPI) at the beginning of this year was 250 and the rate of inflation was 14%; this would mean:

In Bovania, milk constitutes 56% of the typical basket of goods for a typical consumer. Let's say the price of milk rises by 7% and the prices of all other goods fall by 4%. Based on the information given, we can definitely say:

It is rare when prices fall in modern times. However, it is likely that they would fall during severe recessions. What year is the most likely for this to have occurred?

Refer to the following figure to answer the next questions: -Based on the figure, one could correctly state that:

Which statement best represents the purpose for measuring annual inflation (or deflation) ?

In Nation A, the price index rises from 110 to 120 in a particular year. In the same year, the price level rises from 120 to 130 in Nation B. This means:

Refer to the following table to answer the next questions: -As presented in the table, the rate of inflation from 1999-2000 was (rounded to two decimal places) :

The concept of a price index is that:

In terms of inflation, the period from the mid-1980s until today in the United States is called the "Great Moderation." This refers to the fact that:

Consider a nation in which the price index was 150 last year and this year it is 130. Which statement is correct?

Michael Chang buys only tennis rackets during a particular year. During the year in question, the price of all goods rises by 10% on average, but the price of tennis rackets remains the same. Which statement is correct?

Refer to the following figure to answer the next questions: -As presented in the figure, one could correctly state that during the period shown:

The average inflation rate in the United States from 2000-2012 was about: