Question 1

When the quality of a good deteriorates while its price remains the same, the purchasing power of the dollar

Accepted Answer

A)   increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
B)   increases, so the CPI understates the change in the cost of living if the quality change is not accounted for.
C)   decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
D)   decreases, so the CPI understates the change in the cost of living if the quality change is not accounted for.E) B) and C)
F) A) and C)

Question 2

Explain how the prices of goods and services used in the CPI differ from the prices used in the PPI.

Accepted Answer

The CPI focuses on goods and s...

Question 3

If the CPI was 125 this year and 120 last year, then

Accepted Answer

A)   the cost of the CPI basket of goods and services increased by 4.2 percent this year.
B)   the price level increased by 4.2 percent this year.
C)   the inflation rate for this year was 4.2 percent.
D)   All of the above are correct.E) A) and D)
F) A) and C)

Question 4

The U.S. income tax system is completely indexed for inflation.

Accepted Answer

A) True 
 B)False

Question 5

Suppose the price for one gallon of gasoline rises from $3.50 to $4.00 and the price of one gallon of milk rises from $3.00 to $3.20. If the CPI rises from 120 to 132, then people likely will buy

Accepted Answer

A)   more gasoline and more milk.
B)   more gasoline and fewer milk.
C)   less gasoline and more milk.
D)   less gasoline and fewer milk.E) A) and D)
F) A) and C)

Question 6

If the CPI increased from 215 to 218 between the years 2012 and 2013, while the nominal interest rate increased from 3.25% to 3.80%, what is the real interest rate in 2013?

Accepted Answer

The answer of If the CPI increased from 215 to...

Question 7

Table 24-5
The table below pertains to Wrexington, an economy in which the typical consumer's basket consists of 20 pounds of meat and 10 toys.
 
-Refer to Table 24-5. The cost of the basket

Accepted Answer

A)   increased from 2004 to 2005 and increased from 2005 to 2006.
B)   increased from 2004 to 2005 and decreased from 2005 to 2006.
C)   decreased from 2004 to 2005 and increased from 2005 to 2006.
D)   decreased from 2004 to 2005 and decreased from 2005 to 2006.E) None of the above
F) B) and C)

Question 8

Assume that consumers consider rice and potatoes to be substitutes, so that when the price of rice rises, consumers purchase less rice and more potatoes. When the CPI is computed following the increase in the price of rice, it takes into account

Accepted Answer

A)   the increase in the price of rice.
B)   the decrease in the quantity of rice purchased and the increase in the quantity of potatoes purchased.
C)   Both a)  and b)  are correct.
D)   None of the above is correct.E) A) and B)
F) None of the above

Question 9

Suppose you know the value of the consumer price index CPI)  in year 2 as well as the inflation rate in year 2. Which of the following equations is valid for the CPI in year 1?

Accepted Answer

A)   CPI in year 1 = 
B)   CPI in year 1 = 
C)   CPI in year 1 = 
D)   CPI in year 1 = E) B) and C)
F) A) and C)

Question 10

In 1949, Sycamore, Illinois built a hospital for about $500,000. In 1987, the county restored the courthouse for about $1.7 million. A price index for nonresidential construction was 24 in 1949, 108 in 1987, and 126.5 in 2000. According to these numbers, the hospital cost about

Accepted Answer

A)   $2.1 million in 2000 dollars, which is less than the cost of the courthouse restoration in 2000 dollars.
B)   $2.1 million in 2000 dollars, which is more than the cost of the courthouse restoration in 2000 dollars.
C)   $2.6 million in 2000 dollars, which is less than the cost of the courthouse restoration in 2000 dollars.
D)   $2.6 million in 2000 dollars, which is more than the cost of the courthouse restoration in 2000 dollars.E) B) and C)
F) None of the above

Question 11

One of the widely acknowledged problems with using the consumer price index as a measure of the cost of living is that the CPI

Accepted Answer

A)   fails to measure all changes in the quality of goods.
B)   displays a housing bias.
C)   accounts for changes in prices of some goods, but prices of certain goods are assumed to remain constant.
D)   All of the above are correct.E) A) and D)
F) B) and C)

Question 12

An important difference between the GDP deflator and the consumer price index is that

Accepted Answer

A)   the GDP deflator reflects the prices of goods and services bought by producers, whereas the consumer price index reflects the prices of goods and services bought by consumers.
B)   the GDP deflator reflects the prices of all final goods and services produced domestically, whereas the consumer price index reflects the prices of goods and services bought by consumers.
C)   the GDP deflator reflects the prices of all final goods and services produced by a nation's citizens, whereas the consumer price index reflects the prices of all final goods and services bought by consumers.
D)   the GDP deflator reflects the prices of all final goods and services bought by producers and consumers, whereas the consumer price index reflects the prices of all final goods and services bought by consumers.E) All of the above
F) B) and C)

Question 13

Which is likely to have the larger effect on the CPI, a 2 percent increase in the price of food or a 3 percent increase in the price of diamond rings? Explain.

Accepted Answer

The 2 percent increase in the ...

Question 14

When we are calculating the consumer price index and the inflation rate for a certain year,

Accepted Answer

A)   the value of the consumer price index may depend on the choice of a base year, but the inflation rate does not depend on the choice of a base year.
B)   the inflation rate may depend on the choice of a base year, but the value of the consumer price index does not depend on the choice of a base year.
C)   both the value of the consumer price index and the inflation rate may depend on the choice of a base year.
D)   neither the value of the consumer price index nor the inflation rate depends on the choice of a base year.E) All of the above
F) None of the above

Question 15

Scenario 24-6
A small economy produced and consumed goods X and Y in 2010 and 2011 in the amounts shown in the table below. Assume that the market basket for the CPI is defined in the base year.
 
-Refer to Scenario 24-6. Using 2011 as the base year, what is the CPI in each year?

Accepted Answer

The CPI is...

Question 16

What is the difference between the Consumer Price Index and the Producer Price Index?

Accepted Answer

The CPI measures the cost of a...

Question 17

Several studies in the 1990s concluded that the consumer price index overstated inflation by about

Accepted Answer

A)   3 percentage points per year, and that number of percentage points likely still applies now.
B)   3 percentage points per year, but recent improvements to the CPI probably have reduced the overstatement of inflation to something less than 3 percentage points.
C)   1 percentage point per year, and that number of percentage points likely still applies now.
D)   1 percentage point per year, but recent improvements to the CPI probably have reduced the overstatement of inflation to something less than 1 percentage pointE) C) and D)
F) A) and D)

Question 18

There is no longer much debate among economists concerning the severity of and the solution to the problems in using the CPI to measure the cost of living.

Accepted Answer

A) True 
 B)False

Question 19

If the price of beef rises and consumers buy more chicken and less beef, what kind of bias does the consumer price index exhibit?

Accepted Answer

The answer of If the price of beef rises and...

Question 20

To calculate the CPI, the Bureau of Labor Statistics uses

Accepted Answer

A)   the prices of all goods and services produced domestically.
B)   the prices of all final goods and services.
C)   the prices of all consumer goods.
D)   the prices of some consumer goods.E) A) and B)
F) None of the above

Exam 11: Measuring the Cost of Living

If the price of beef rises and consumers buy more chicken and less beef, what kind of bias does the consumer price index exhibit?

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Table 24-5 The table below pertains to Wrexington, an economy in which the typical consumer's basket consists of 20 pounds of meat and 10 toys. -Refer to Table 24-5. The cost of the basket

Correct AnswerverifiedShow Answer

When the quality of a good deteriorates while its price remains the same, the purchasing power of the dollar

Correct AnswerverifiedShow Answer

What is the difference between the Consumer Price Index and the Producer Price Index?

Correct AnswerverifiedThe CPI measures the cost of a...View AnswerShow Answer

Which is likely to have the larger effect on the CPI, a 2 percent increase in the price of food or a 3 percent increase in the price of diamond rings? Explain.

Correct AnswerverifiedThe 2 percent increase in the ...View AnswerShow Answer

To calculate the CPI, the Bureau of Labor Statistics uses

Correct AnswerverifiedShow Answer

In 1949, Sycamore, Illinois built a hospital for about $500,000. In 1987, the county restored the courthouse for about $1.7 million. A price index for nonresidential construction was 24 in 1949, 108 in 1987, and 126.5 in 2000. According to these numbers, the hospital cost about

Correct AnswerverifiedShow Answer

If the CPI was 125 this year and 120 last year, then

Correct AnswerverifiedShow Answer

One of the widely acknowledged problems with using the consumer price index as a measure of the cost of living is that the CPI

Correct AnswerverifiedShow Answer

Suppose you know the value of the consumer price index CPI) in year 2 as well as the inflation rate in year 2. Which of the following equations is valid for the CPI in year 1?

Correct AnswerverifiedShow Answer

Assume that consumers consider rice and potatoes to be substitutes, so that when the price of rice rises, consumers purchase less rice and more potatoes. When the CPI is computed following the increase in the price of rice, it takes into account

Correct AnswerverifiedShow Answer

Several studies in the 1990s concluded that the consumer price index overstated inflation by about

Correct AnswerverifiedShow Answer

When we are calculating the consumer price index and the inflation rate for a certain year,

Correct AnswerverifiedShow Answer

An important difference between the GDP deflator and the consumer price index is that

Correct AnswerverifiedShow Answer

Explain how the prices of goods and services used in the CPI differ from the prices used in the PPI.

Correct AnswerverifiedThe CPI focuses on goods and s...View AnswerShow Answer

If the CPI increased from 215 to 218 between the years 2012 and 2013, while the nominal interest rate increased from 3.25% to 3.80%, what is the real interest rate in 2013?

Correct AnswerverifiedShow Answer

Suppose the price for one gallon of gasoline rises from $3.50 to $4.00 and the price of one gallon of milk rises from $3.00 to $3.20. If the CPI rises from 120 to 132, then people likely will buy

Correct AnswerverifiedShow Answer

The U.S. income tax system is completely indexed for inflation.

Correct AnswerverifiedShow Answer

There is no longer much debate among economists concerning the severity of and the solution to the problems in using the CPI to measure the cost of living.

Correct AnswerverifiedShow Answer

Scenario 24-6 A small economy produced and consumed goods X and Y in 2010 and 2011 in the amounts shown in the table below. Assume that the market basket for the CPI is defined in the base year. -Refer to Scenario 24-6. Using 2011 as the base year, what is the CPI in each year?

Correct AnswerverifiedThe CPI is...View AnswerShow Answer

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The 2 percent increase in the ...
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The CPI focuses on goods and s...
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The CPI is...
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