Question 1

Ruben earned a salary of $60,000 in 2001 and $80,000 in 2006. The consumer price index was 177 in 2001 and 221.25 in 2006. Ruben's 2001 salary in 2006 dollars is

Accepted Answer

A)  $75,000; thus, Ruben's purchasing power increased between 2001 and 2006.
B)  $75,000; thus, Ruben's purchasing power decreased between 2001 and 2006.
C)  $85,000; thus, Ruben's purchasing power increased between 2001 and 2006.
D)  $85,000; thus, Ruben's purchasing power decreased between 2001 and 2006.E) A) and C)
F) All of the above

Question 2

Substitution bias causes the CPI to understate the increase in the cost of living from one year to the next.

Accepted Answer

A) True 
 B)False

Question 3

What measure reflects the overall cost of goods and services produced domestically?

Accepted Answer

The answer of What measure reflects the overall cost of...

Question 4

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. If the base year is 2006, then the CPI

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

Question 5

Suppose that over the past year, the nominal interest rate was 5 percent, the CPI was 150.3 at the end of the year, and the CPI was 144.2 at the beginning of the year. It follows that

Accepted Answer

A)  the dollar value of savings increased at 5 percent, and the purchasing power of savings increased at 0.8 percent.
B)  the dollar value of savings increased at 5 percent, and the purchasing power of savings increased at 9.2 percent.
C)  the dollar value of savings increased at 0.8 percent, and the purchasing power of savings increased at 5 percent.
D)  the dollar value of savings increased at 9.2 percent, and the purchasing power of savings increased at 5 percent.E) B) and D)
F) A) and C)

Question 6

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 7

The price index was 150 in the first year, 160 in the second year, and 165 in the third year. Which of the following statements is correct?

Accepted Answer

A)  The price level was higher in the second year than in the first year, and it was higher in the third year than in the second year.
B)  The inflation rate was positive between the first and second years, and it was positive between the second and third years.
C)  The inflation rate was lower between the second and third years than it was between the first and second years.
D)  All of the above are correct.E) A) and D)
F) None of the above

Question 8

The real interest rate tells you how fast the purchasing power of your bank account rises over time.

Accepted Answer

A) True 
 B)False

Question 9

Scenario 24-1
The price tag on a tennis ball in 1975 read $0.10, and the price tag on a tennis ball in 2005 read $1.00. The CPI in 1975 was 52.3, and the CPI in 2005 was 191.3.
-Refer to Scenario 24-1. The price of a 1975 tennis ball in 2005 dollars is

Accepted Answer

A)  $0.03.
B)  $0.27.
C)  $0.37.
D)  $1.00.E) B) and D)
F) B) and C)

Question 10

The CPI is always 1 in the base year.

Accepted Answer

A) True 
 B)False

Question 11

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) A) and B)

Question 12

If the nominal interest rate is 9 percent and the real interest rate is 3 percent, then the inflation rate is

Accepted Answer

A)  -6 percent.
B)  3 percent.
C)  6 percent.
D)  12 percent.E) A) and D)
F) B) and D)

Question 13

Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Bob withdraws his $105. If inflation was 7 percent during the year the money was deposited, then Bob's purchasing power has increased by 2 percent.

Accepted Answer

A) True 
 B)False

Question 14

In the calculation of the CPI, tea is given greater weight than beer if

Accepted Answer

A)  the price of tea is higher than the price of beer.
B)  it costs more to produce tea than it costs to produce beer.
C)  tea is more readily available than beer to the typical consumer.
D)  consumers buy more tea than beer.E) All of the above
F) A) and B)

Question 15

The primary purpose of measuring the overall level of prices in the economy is to

Accepted Answer

A)  allow for the measurement of GDP.
B)  allow consumers to know what kinds of prices to expect in the future.
C)  allow for the comparison of dollar figures from different points in time.
D)  allow for the comparison of dollar figures from the same point in time.E) A) and B)
F) B) and C)

Question 16

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

Question 17

Ethel purchased a bag of groceries in 1970 for $8. She purchased the same bag of groceries in 2006 for $25. If the price index was 38.8 in 1970 and the price index was 180 in 2006, then what is the price of the 1970 bag of groceries in 2006 dollars?

Accepted Answer

A)  $5.39
B)  $25.00
C)  $29.11
D)  $37.11E) B) and C)
F) None of the above

Question 18

Which of the following statements is correct about the relationship between inflation and interest rates?

Accepted Answer

A)  There is no relationship between inflation and interest rates.
B)  The interest rate is determined by the rate of inflation.
C)  In order to fully understand inflation, we need to know how to correct for the effects of interest rates.
D)  In order to fully understand interest rates, we need to know how to correct for the effects of inflation.E) B) and D)
F) B) and C)

Question 19

Write the formula for finding the rate of inflation in 2011 if you have only the CPI for the years 2010, 2011, and 2012.

Accepted Answer

The answer of Write the formula for finding the rate...

Question 20

With respect to the consumer price index, which of the following does not serve as an example of how the substitution bias arises? Between 2010 and 2011, the price of a pound of peanuts

Accepted Answer

A)  rises from $0.80 to $1.00 while the price of a loaf of bread rises from $2.00 to $2.50.
B)  rises from $1.00 to $1.30 while the price of a loaf of bread rises from $2.00 to $2.30.
C)  remains constant, while the price of a loaf of bread rises from $2.00 to $2.30.
D)  falls from $1.00 to $0.80 while the price of a loaf of bread falls from $2.00 to $1.80.E) A) and B)
F) A) and C)

Exam 24: Measuring the Cost of Living

Suppose that over the past year, the nominal interest rate was 5 percent, the CPI was 150.3 at the end of the year, and the CPI was 144.2 at the beginning of the year. It follows that

Correct AnswerverifiedShow Answer

In the calculation of the CPI, tea is given greater weight than beer if

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The real interest rate tells you how fast the purchasing power of your bank account rises over time.

Correct AnswerverifiedShow Answer

Write the formula for finding the rate of inflation in 2011 if you have only the CPI for the years 2010, 2011, and 2012.

Correct AnswerverifiedShow Answer

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. If the base year is 2006, then the CPI

Correct AnswerverifiedShow Answer

The primary purpose of measuring the overall level of prices in the economy is to

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Scenario 24-1 The price tag on a tennis ball in 1975 read $0.10, and the price tag on a tennis ball in 2005 read $1.00. The CPI in 1975 was 52.3, and the CPI in 2005 was 191.3. -Refer to Scenario 24-1. The price of a 1975 tennis ball in 2005 dollars is

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What measure reflects the overall cost of goods and services produced domestically?

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The price index was 150 in the first year, 160 in the second year, and 165 in the third year. Which of the following statements is correct?

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Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Bob withdraws his $105. If inflation was 7 percent during the year the money was deposited, then Bob's purchasing power has increased by 2 percent.

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

The CPI is always 1 in the base year.

Correct AnswerverifiedShow Answer

Ethel purchased a bag of groceries in 1970 for $8. She purchased the same bag of groceries in 2006 for $25. If the price index was 38.8 in 1970 and the price index was 180 in 2006, then what is the price of the 1970 bag of groceries in 2006 dollars?

Correct AnswerverifiedShow Answer

Ruben earned a salary of $60,000 in 2001 and $80,000 in 2006. The consumer price index was 177 in 2001 and 221.25 in 2006. Ruben's 2001 salary in 2006 dollars is

Correct AnswerverifiedShow Answer

With respect to the consumer price index, which of the following does not serve as an example of how the substitution bias arises? Between 2010 and 2011, the price of a pound of peanuts

Correct AnswerverifiedShow Answer

Which of the following statements is correct about the relationship between inflation and interest rates?

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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

If the nominal interest rate is 9 percent and the real interest rate is 3 percent, then the inflation rate is

Correct AnswerverifiedShow Answer

Substitution bias causes the CPI to understate the increase in the cost of living from one year to the next.

Correct AnswerverifiedShow Answer

When the consumer price index rises, the typical family

Correct AnswerverifiedShow Answer

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