Question 1

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 2

The consumer price index and the GDP deflator are two alternative measures of the overall price level.Which of the following statements about the two measures is correct?

Accepted Answer

A)   The CPI involves a base year;the GDP deflator does not involve a base year.
B)   The CPI can be used to compute the inflation rate;the GDP deflator cannot be used to compute the inflation rate.
C)   The CPI reflects the prices of goods and services produced domestically;the GDP deflator reflects the prices of all goods and services bought by consumers.
D)   The CPI reflects a fixed basket of goods and services;the GDP deflator reflects current production of goods and services.E) B) and C)
F) All of the above

Question 3

Substitution bias occurs because the CPI ignores the possibility of consumer substitution toward goods that have become relatively less expensive.

Accepted Answer

A) True 
 B)False

Question 4

When the consumer price index rises,the typical family

Accepted Answer

A)   has to spend more dollars to maintain the same standard of living.
B)   can spend fewer dollars to maintain the same standard of living.
C)   finds that its standard of living is not affected.
D)   can offset the effects of rising prices by saving more.E) B) and C)
F) All of the above

Question 5

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) C) and D)
F) B) and D)

Question 6

If the nominal interest rate is 6 percent and the rate of inflation is 10 percent,then the real interest rate is

Accepted Answer

A)   -16 percent.
B)   -4 percent.
C)   4 percent.
D)   16 percent.E) None of the above
F) A) and B)

Question 7

If the CPI was 68 in 1965 and is 285 today,then $100 today purchases the same amount of goods and services as

Accepted Answer

A)   $23.86 purchased in 1965.
B)   $32.47 purchased in 1965.
C)   $68.00 purchased in 1965.
D)   $419.12 purchased in 1965.E) B) and D)
F) B) and C)

Question 8

If the nominal interest rate is 8 percent and the real interest rate is 3.5 percent,then the inflation rate is

Accepted Answer

A)   -4.5 percent.
B)   0.78 percent.
C)   4.5 percent.
D)   11.5 percent.E) All of the above
F) A) and D)

Question 9

You know that a candy bar cost five cents in 1962.You also know the CPI for 1962 and the CPI for today.Which of the following would you use to compute the price of the candy bar in today's prices?

Accepted Answer

A)   five cents(1962 CPI / today's CPI) 
B)   five cents((today's CPI - 1962 CPI) /1962 CPI) 
C)   five cents(today's CPI / 1962 CPI) 
D)   five centstoday's CPI - five cents1962 CPI.E) A) and B)
F) A) and C)

Question 10

Suppose that over the past year,the real interest rate was 6 percent and the inflation rate was 4 percent.It follows that

Accepted Answer

A)   the dollar value of savings increased at 6 percent,and the purchasing power of savings increased at 2 percent.
B)   the dollar value of savings increased at 6 percent,and the purchasing power of savings increased at 10 percent.
C)   the dollar value of savings increased at 10 percent,and the purchasing power of savings increased at 2 percent.
D)   the dollar value of savings increased at 10 percent,and the purchasing power of savings increased at 6 percent.E) A) and C)
F) C) and D)

Question 11

For the purpose of calculating the consumer price index,the basket of goods

Accepted Answer

A)   is kept the same from year to year so that the effects of price changes are isolated from the effect of any quantity changes that might be occurring at the same time.
B)   is kept the same from year to year;otherwise,the value of the index would remain constant from year to year.
C)   varies from year to year;otherwise,the value of the index would remain constant from year to year.
D)   varies from year to year so that consumers' buying patterns are updated in a timely fashion.E) A) and B)
F) A) and D)

Question 12

By far the largest category of goods and services in the CPI basket is

Accepted Answer

A)   housing.
B)   transportation.
C)   education & communication.
D)   food & beverages.E) B) and C)
F) A) and B)

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

In the CPI,goods and services are weighted according to

Accepted Answer

A)   how long a market has existed for each good or service.
B)   the extent to which each good or service is regarded by the government as a necessity.
C)   how much consumers buy of each good or service.
D)   the number of firms that produce and sell each good or service.E) C) and D)
F) All of the above

Question 15

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) A) and C)
F) A) and B)

Question 16

Scenario 24-2
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 24-2.Using 2011 as the base year,what is the CPI in each year?

Accepted Answer

The CPI is...

Question 17

If the CPI was 170 in 1998 and was 187 in 1999,what was the inflation rate in 1999?

Accepted Answer

The inflat...

Question 18

When the price of nuclear missiles rises,this change is reflected in the CPI but not in the GDP deflator.

Accepted Answer

A) True 
 B)False

Question 19

During a certain year,the consumer price index increased from 150 to 159 and the purchasing power of a person's bank account increased by 3.5 percent.For that year,

Accepted Answer

A)   the nominal interest rate was 6 percent.
B)   the nominal interest rate was 9.5 percent.
C)   the inflation rate was 3.5 percent.
D)   the inflation rate was 9.5 percent.E) None of the above
F) All of the above

Question 20

When constructing the consumer price index,the Bureau of Labor Statistics does not do which of the following?

Accepted Answer

A)   Try to include all the goods and services that the typical consumer buys.
B)   Try to weight the goods and services that the typical consumer buys according to how much consumers buy of each item.
C)   Survey consumers to determine what the typical consumer buys.
D)   Survey sellers to determine what the typical consumer buys.E) A) and B)
F) C) and D)

Exam 24: Measuring the Cost of Living

When constructing the consumer price index,the Bureau of Labor Statistics does not do which of the following?

Correct AnswerverifiedShow Answer

By far the largest category of goods and services in the CPI basket is

Correct AnswerverifiedShow Answer

In the CPI,goods and services are weighted according to

Correct AnswerverifiedShow Answer

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

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

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

Correct AnswerverifiedShow Answer

If the CPI was 68 in 1965 and is 285 today,then $100 today purchases the same amount of goods and services as

Correct AnswerverifiedShow Answer

For the purpose of calculating the consumer price index,the basket of goods

Correct AnswerverifiedShow Answer

If the CPI was 170 in 1998 and was 187 in 1999,what was the inflation rate in 1999?

Correct AnswerverifiedThe inflat...View AnswerShow Answer

When the consumer price index rises,the typical family

Correct AnswerverifiedShow Answer

Suppose that over the past year,the real interest rate was 6 percent and the inflation rate was 4 percent.It follows that

Correct AnswerverifiedShow Answer

Scenario 24-2 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 24-2.Using 2011 as the base year,what is the CPI in each year?

Correct AnswerverifiedThe CPI is...View AnswerShow Answer

The consumer price index and the GDP deflator are two alternative measures of the overall price level.Which of the following statements about the two measures is correct?

Correct AnswerverifiedShow Answer

Substitution bias occurs because the CPI ignores the possibility of consumer substitution toward goods that have become relatively less expensive.

Correct AnswerverifiedShow Answer

If the nominal interest rate is 6 percent and the rate of inflation is 10 percent,then the real interest rate is

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

During a certain year,the consumer price index increased from 150 to 159 and the purchasing power of a person's bank account increased by 3.5 percent.For that year,

Correct AnswerverifiedShow Answer

You know that a candy bar cost five cents in 1962.You also know the CPI for 1962 and the CPI for today.Which of the following would you use to compute the price of the candy bar in today's prices?

Correct AnswerverifiedShow Answer

If the nominal interest rate is 8 percent and the real interest rate is 3.5 percent,then the inflation rate is

Correct AnswerverifiedShow Answer

When the price of nuclear missiles rises,this change is reflected in the CPI but not in the GDP deflator.

Correct AnswerverifiedShow Answer

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The inflat...
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The CPI is...
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