Question 1

Explain how the introduction of new goods might bias the calculation of the consumer price index.

Accepted Answer

Because the CPI is based on a fixed bask...

Question 2

Suppose the typical consumer buys more bananas than oranges. In fixing the basket of goods and services for the purpose of calculating the consumer price index, the Bureau of Labor Statistics

Accepted Answer

A)   ignores the fact that the typical consumer buys more bananas than orange; this procedure does not affect the value of the index.
B)   ignores the fact that the typical consumer buys more bananas than orange; this procedure results in a potentially-serious bias in the index.
C)   places more weight on the price of bananas than on the price of oranges; the weights of the two prices are determined by surveying consumers.
D)   places more weight on the price of bananas than on the price of oranges; the weights of the two prices are determined by the extent to which those prices have changed over the previous year.E) A) and B)
F) B) and D)

Question 3

Which of the following pairs of values of the consumer price index (CPI)  is consistent with an inflation rate of 10 percent for 2014?

Accepted Answer

A)   CPI in 2014 = 90; CPI in 2015 = 100
B)   CPI in 2014 = 102; CPI in 2015 = 112
C)   CPI in 2013 = 210; CPI in 2014 = 220
D)   CPI in 2013 = 210; CPI in 2014 = 231E) None of the above
F) B) and C)

Question 4

Because the CPI is based on a fixed basket of goods, the introduction of new goods and services in the economy causes the CPI to overestimate the cost of living. This is so because

Accepted Answer

A)   new goods and services are always of higher quality than existing goods and services.
B)   new goods and services cost less than existing goods and services.
C)   new goods and services cost more than existing goods and services.
D)   when a new good is introduced, it gives consumers greater choice, thus reducing the amount they must spend to maintain their standard of living.E) B) and D)
F) B) and C)

Question 5

In general, if a consumer good is produced domestically and consumed domestically, a decrease in its price will have which of the following effects?

Accepted Answer

A)   The consumer price index will decrease relatively more than will the GDP deflator.
B)   The consumer price index and the GDP deflator will decrease by the same amount.
C)   The consumer price index will decrease relatively less than will the GDP deflator.
D)   One cannot generalize about the decrease in the consumer price index relative to the decrease in the GDP deflator.E) A) and B)
F) A) and C)

Question 6

Suppose a basket of goods and services has been selected to calculate the CPI and 2014 has been selected as the base year. In 2013, the basket's cost was $80; in 2014, the basket's cost was $86; and in 2015, the basket's cost was $90. The value of the CPI in 2015 was

Accepted Answer

A)   112.5 and the inflation rate was 12.5%.
B)   112.5 and the inflation rate was 4.6%.
C)   104.6 and the inflation rate was 4.6%.
D)   104.6 and the inflation rate was 12.5%.E) All of the above
F) None of the above

Question 7

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 D)
F) B) and D)

Question 8

For an imaginary economy, the value of the consumer price index was 138.75 in 2016, and the inflation rate was 10 percent between 2015 and 2016. The consumer price index in 2015 was

Accepted Answer

A)   126.1.
B)   128.8.
C)   148.8.
D)   152.6.E) All of the above
F) A) and D)

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

Table 24-2
The table below pertains to Pieway, an economy in which the typical consumer's basket consists of 15 bushels of peaches and 10 bushels of pecans. 
-Refer to Table 24-2. The cost of the basket in 2013 was

Accepted Answer

A)   $200.
B)   $225.
C)   $235.
D)   $237.5.E) A) and C)
F) A) and D)

Question 11

Table 24-10
The table below shows the prices of baseballs and baseball bats for three years. Assume the typical consumer's basket consists of 6 baseballs and 2 baseball bats. 
-Refer to Table 24-10. If 2009 is the base year, then the consumer price index was

Accepted Answer

A)   83.00 in 2008, 100.00 in 2009, and 132.50 in 2010.
B)   89.97 in 2008, 100.00 in 2009, and 117.43 in 2010.
C)   90.88 in 2008, 100.00 in 2009, and 117.43 in 2010.
D)   169.50 in 2008, 186.50 in 2009, and 219.00 in 2010.E) B) and C)
F) C) and D)

Question 12

What do real interest rates account for that nominal interest rates do not?

Accepted Answer

Unlike nominal interest rates,...

Question 13

The steps involved in calculating the consumer price index and the inflation rate, in order, are as follows:

Accepted Answer

A)   Choose a base year, update the basket, find the prices, estimate the basket's cost, compute the index, and compute the inflation rate.
B)   Choose a base year, fix the basket, find the prices, compute the inflation rate, compute the basket's cost, and compute the index.
C)   Fix the basket, find the prices, compute the basket's cost, choose a base year and compute the index, and compute the inflation rate.
D)   Fix the basket, find the prices, compute the inflation rate, compute the basket's cost, and choose a base year and compute the index.E) A) and D)
F) A) and C)

Question 14

Suppose that the price of one ear of corn was $0.05 in 1920, that the CPI in 1920 was 10, and that in 1990 the CPI was 180. What is the price of a 1920 ear of corn in 1990 dollars?

Accepted Answer

The price of a 1920 ...

Question 15

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. In 1975 dollars, a 1975 tennis ball cost $0.10 and a 2005 tennis ball cost

Accepted Answer

A)   $0.27, so tennis balls were cheaper in 1975.
B)   $0.27, so tennis balls were cheaper in 2005.
C)   $3.66, so tennis balls were cheaper in 1975.
D)   $3.66, so tennis balls were cheaper in 2005.E) A) and B)
F) A) and C)

Question 16

An increase in the price of imported coffee shows up

Accepted Answer

A)   in the consumer price index and in the GDP deflator.
B)   in the consumer price index, but not in the GDP deflator.
C)   in the GDP deflator, but not in the consumer price index.
D)   in neither the consumer price index nor in the GDP deflator.E) A) and B)
F) A) and C)

Question 17

Consumer price index = × 100.

Accepted Answer

A) True 
 B)False

Question 18

For purposes of calculating the CPI, the apparel category of consumer spending includes the cost of

Accepted Answer

A)   clothing, but not footwear or jewelry.
B)   clothing and footwear, but not jewelry.
C)   clothing and jewelry, but not footwear.
D)   clothing, footwear, and jewelry.E) All of the above
F) None of the above

Question 19

Which of the following changes in the price index produces the greatest rate of inflation: 100 to 110, 150 to 165, or 180 to 198?

Accepted Answer

A)   100 to 110
B)   150 to 165
C)   180 to 198
D)   All of these changes produce the same rate of inflation.E) C) and D)
F) A) and D)

Question 20

Table 24-6
The table below pertains to Napandsnack, an economy in which the typical consumer's basket consists of 2 pillows and 15 hotdogs. 
-Refer to Table 24-6. If the base year is 2010, then the consumer price index was

Accepted Answer

A)   83.33 in 2009, 100.00 in 2010, and 96.67 in 2011.
B)   85.56 in 2009, 100.00 in 2010, and 102.22 in 2011.
C)   85.56 in 2009, 100.00 in 2010, and 96.67 in 2011.
D)   92.22 in 2009, 99.00 in 2010, and 95.22 in 2011.E) B) and C)
F) A) and C)

Exam 24: Measuring the Cost of Living

Consumer price index = × 100.

Correct AnswerverifiedShow Answer

Because the CPI is based on a fixed basket of goods, the introduction of new goods and services in the economy causes the CPI to overestimate the cost of living. This is so because

Correct AnswerverifiedShow Answer

The steps involved in calculating the consumer price index and the inflation rate, in order, are as follows:

Correct AnswerverifiedShow Answer

Suppose the typical consumer buys more bananas than oranges. In fixing the basket of goods and services for the purpose of calculating the consumer price index, the Bureau of Labor Statistics

Correct AnswerverifiedShow Answer

What do real interest rates account for that nominal interest rates do not?

Correct AnswerverifiedUnlike nominal interest rates,...View AnswerShow Answer

Table 24-10 The table below shows the prices of baseballs and baseball bats for three years. Assume the typical consumer's basket consists of 6 baseballs and 2 baseball bats. -Refer to Table 24-10. If 2009 is the base year, then the consumer price index was

Correct AnswerverifiedShow Answer

An increase in the price of imported coffee shows up

Correct AnswerverifiedShow Answer

Suppose that the price of one ear of corn was $0.05 in 1920, that the CPI in 1920 was 10, and that in 1990 the CPI was 180. What is the price of a 1920 ear of corn in 1990 dollars?

Correct AnswerverifiedThe price of a 1920 ...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following changes in the price index produces the greatest rate of inflation: 100 to 110, 150 to 165, or 180 to 198?

Correct AnswerverifiedShow Answer

Which of the following pairs of values of the consumer price index (CPI) is consistent with an inflation rate of 10 percent for 2014?

Correct AnswerverifiedShow Answer

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. In 1975 dollars, a 1975 tennis ball cost $0.10 and a 2005 tennis ball cost

Correct AnswerverifiedShow Answer

Table 24-6 The table below pertains to Napandsnack, an economy in which the typical consumer's basket consists of 2 pillows and 15 hotdogs. -Refer to Table 24-6. If the base year is 2010, then the consumer price index was

Correct AnswerverifiedShow Answer

Suppose a basket of goods and services has been selected to calculate the CPI and 2014 has been selected as the base year. In 2013, the basket's cost was $80; in 2014, the basket's cost was $86; and in 2015, the basket's cost was $90. The value of the CPI in 2015 was

Correct AnswerverifiedShow Answer

Table 24-2 The table below pertains to Pieway, an economy in which the typical consumer's basket consists of 15 bushels of peaches and 10 bushels of pecans. -Refer to Table 24-2. The cost of the basket in 2013 was

Correct AnswerverifiedShow Answer

In general, if a consumer good is produced domestically and consumed domestically, a decrease in its price will have which of the following effects?

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

For purposes of calculating the CPI, the apparel category of consumer spending includes the cost of

Correct AnswerverifiedShow Answer

Explain how the introduction of new goods might bias the calculation of the consumer price index.

Correct AnswerverifiedBecause the CPI is based on a fixed bask...View AnswerShow Answer

For an imaginary economy, the value of the consumer price index was 138.75 in 2016, and the inflation rate was 10 percent between 2015 and 2016. The consumer price index in 2015 was

Correct AnswerverifiedShow Answer

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Unlike nominal interest rates,...
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The price of a 1920 ...
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Because the CPI is based on a fixed bask...
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