ECON 02 – Measuring the Cost of Living

The consumer price index is used to
a.
monitor changes in the level of wholesale prices in the economy.
b.
monitor changes in the cost of living over time.
c.
monitor changes in the level of real GDP over time.
d.
monitor changes in the stock market.

monitor changes in the cost of living over time.

What basket of goods and services is used to construct the CPI?
a.
a random sample of all goods and services produced in the economy
b.
the goods and services that are typically bought by consumers as determined by government surveys
c.
only food, clothing, transportation, entertainment, and education
d.
the least expensive and the most expensive goods and services in each major category of consumer expenditures

the goods and services that are typically bought by consumers as determined by government surveys

If the CPI was 95 in 1955 and is 475 today, then $100 today purchases the same amount of goods and services as
a.
$4.75 purchased in 1955.
b.
$20.00 purchased in 1955.
c.
$95.00 purchased in 1955.
d.
$500 purchased in 1955.

$20.00 purchased in 1955

the increase in CPI automatically determines:

-the COLA (cost of leading allowances) in many multi-year labor contracts -adjustments in social security payments and federal income tax brackets

based on CPI*

we are going to adjust social security payments*

1. the CPI is more commonly used as a gauge of inflation than the GDP deflator is because

…

16. if the CPI was 108 in 1942 and is 336.96 today, then $10 in 1942 purchased the same amount of goods and services as

$31.20 purchases today

18. john just graduated law school and has two competing job offers. the first is in Phoenix and pays a salary of $150,000. he has a similar job offer in Cleveland that pas $90,000. which pair of CPI’s would make the two salaries have the same purchasing power?

70 in Phoenix and 42 in Cleveland

21. suppose the consumer price index was 184 in 2009 and 198.17 in 2010. the nominal interest rate during this period was 5.8 percent. what was the real interest rate during this period?

-1.9 percent

22. suppose that over the past year, the real interest rate was 3 percent and the inflation rate was 1 percent, it follows that:

the dollar value of savings increased at 4 percent, and the purchasing power of savings increased at 3 percent

Babe Ruth’s 1931 salary was $80,000. Government statistics show a consumer price index of 15.2 for 1931 and 229.6 for 2012. Ruth’s 1931 salary was equivalent to a 2012 salary of about

$1,208,421

In 1931, President Herbert Hoover was paid a salary of $75,000. Government statistics show a consumer price index of 15.2 for 1931 and 229.6 for 2012. President Hoover’s 1931 salary was equivalent to a 2012 salary of about

$1,132,895.

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

housing

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

104.6 and the inflation rate was 4.6%.

Indexation refers to

using a law or contract to automatically correct a dollar amount for the effects of inflation.

The nominal interest rate tells you

how fast the number of dollars in your bank account rises over time.

A decrease in the price of large tractors imported into the United States from Russia

leaves both the GDP deflator and the consumer price index unchanged.

In the CPI, goods and services are weighted according to

how much consumers buy of each good or service.

By not taking into account the possibility of consumer substitution, the CPI

overstates the cost of living.

Assume an economy experienced a positive rate of inflation between 2003 and 2004 and again between 2004 and 2005. However, the inflation rate was lower between 2004 and 2005 than it was between 2003 and 2004. Which of the following scenarios is consistent with this assumption?

The CPI was 100 in 2003, 120 in 2004, and 135 in 2005.

Rosa deposits $100 in a bank account that pays an annual interest rate of 20 percent. A year later, after Rosa has accumulated $20 in interest, she withdraws her $120. Rosa’s purchasing power

did not change if the inflation rate was 20 percent.

Social Security payments are indexed for inflation using

the CPI.

In the calculation of the CPI, books are given greater weight than magazines if

consumers buy more books than magazines.

Henri earned a salary of $50,000 in 2001 and $60,000 in 2012. The consumer price index was 177 in 2001 and 225 in 2012. Henri’s 2001 salary in 2012 dollars is

$63,559.32.

A worker received $5 for a daily wage in 1930. What is the value of that wage today if the CPI was 17 in 1930 and is 230 today?

$67.65

From 2013 to 2014, the CPI for medical care increased from 150 to 159. What was the inflation rate for medical care?

6.0 percent

The CPI differs from the GDP deflator in that

increases in the prices of foreign produced goods that are sold to U.S. consumers show up in the CPI but not in the GDP deflator.

The substitution bias in the consumer price index refers to the

substitution by consumers toward goods that have become relatively less expensive and away from goods that have become relatively more expensive.

If 2010 is the base year, then the inflation rate in 2015 equals

CPI in 2015- CPI in 2014 / CPI in 2014 x100

An increase in the price of Irish whiskey imported into the United States will be reflected in

the U.S. CPI, but not the U.S. GDP deflator.

When looking at a graph of nominal and real interest rates you notice that nominal rates always lie above real rates. From this you conclude

consumer prices were always rising in the time frame represented on the graph.

Suppose a basket of goods and services has been selected to calculate the CPI and 2014 has been selected as the base year. In 2012, the basket’s cost was $50; in 2014, the basket’s cost was $52; and in 2016, the basket’s cost was $58. The value of the CPI in 2016 was

111.5.

In calculating the CPI, a fixed basket of goods and services is used. The quantities of the goods and services in the fixed basket are determined by

surveying consumers.

The consumer price index was 225 in 2008 and 232.2 in 2009. The nominal interest rate during this period was 6.5 percent. What was the real interest rate during this period?

3.3 percent

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

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.

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

$23.86 purchased in 1965.

For an imaginary economy, the consumer price index was 115.00 in 2004, 126.50 in 2005, and 136.62 in 2006. Which of the following statements is correct?

a. For this economy, the base year must be 2004. b. If the basket of goods that is used to calculate the CPI cost $75.00 in the base year, then that basket of goods cost $115.00 in 2004. c. This economy’s rate of inflation for 2006 is 10.12 percent. Correctd. ***None of the above is correct.**

Arlo is offered a job in Des Moines, where the CPI is 60, and a job in New York, where the CPI is 125. Arlo’s job offer in Des Moines is for $48,000. How much does the New York job have to pay in order for the two salaries to represent the same purchasing power?

$100,000

For any given year, the CPI is the price of the basket of goods and services in the

given year divided by the price of the basket in the base year, then multiplied by 100.

A decrease in the price of domestically produced industrial robots will be reflected in

the GDP deflator but not in the consumer price index.

The consumer price index is used to
a. convert nominal GDP into real GDP.
b. turn dollar figures into meaningful measures of purchasing power.
c. characterize the types of goods and services that consumers purchase.
d. measure the quantity of goods and services that the economy produces.

B

When the consumer price index falls, the typical family
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 save less because they do not need to offset the effects of rising prices.

B

. The term inflation is used to describe a situation in which
a. the overall level of prices in the economy is increasing.
b. incomes in the economy are increasing.
c. stock-market prices are rising.
d. the economy is growing rapidly.

A

The inflation rate is defined as the
a. price level in an economy.
b. change in the price level from one period to the next.
c. percentage change in the price level from the previous period.
d. price level minus the price level from the previous period.

C

The CPI is a measure of the overall cost of the goods and services bought by
a. a typical firm.
b. the government.
c. a typical consumer.
d. All of the above are correct.

C

The CPI is calculated
a. monthly by the Department of Commerce.
b. monthly by the Bureau of Labor Statistics.
c. quarterly by the Department of Commerce.
d. quarterly by the Bureau of Labor Statistics.

B

In the CPI, goods and services are weighted according to
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.

C

. Consider a small economy in which consumers buy only two goods: apples and pears. In order to compute the consumer price index for this economy for two or more consecutive years, we assume that
a. the number of apples bought by the typical consumer is equal to the number of pears bought by the typical consumer in each year.
b. neither the number of apples nor the number of pears bought by the typical consumer changes from year to year.
c. the percentage change in the price of apples is equal to the percentage change in the price of pears from year to year.
d. neither the price of apples nor the price of pears changes from year to year.

B

When computing the cost of the basket of goods and services purchased by a typical consumer, which of the following changes from year to year?
a. the quantities of the goods and services purchased
b. the prices of the goods and services
c. the goods and services making up the basket
d. All of the above are correct.

B

In computing the consumer price index, a base year is chosen. Which of the following statements about the base year is correct?
a. The base year is always the first year among the years for which computations are being made.
b. It is necessary to designate a base year only in the simplest case of two goods; in more realistic cases, it is not necessary to designate a base year.
c. The value of the consumer price index is always 100 in the base year.
d. The base year is always the year in which the cost of the basket was highest among the years for which computations are being made.

C

The inflation rate is calculated
a. by determining the change in the price index from the preceding period.
b. by determining the change in the price index from the base year.
c. by determining the percentage change in the price index from the preceding period.
d. by determining the percentage change in the price index from the base year.

C

If 2010 is the base year, then the inflation rate in 2015 equals
a. CPI in 2015-CPI in 2014 *100/ CPI in 2010
b. CPI in 2015-CPI in 2010 *100/ CPI in 2010
c. CPI in 2015-CPI in 2010 *100/ CPI in 2014
d. CPI in 2015-CPI in 2014 *100/ CPI in 2014

D

Which of the following is the correct formula for calculating the consumer price index?
a. CPI in year 1-CPI in year 2 *100/ CPI in year 2
b. price of basket of goods and services in current yer*100/price of basket in base year
c. price of basket of goods and services in current year -price of basket in base year *100/price of basket in base year
d. price of basket of goods and services in base year*100/price of absket in current year

B

If the consumer price index was 96 in 2012, 100 in 2013, and 102 in 2014, then the base year must be
a. 2012.
b. 2013.
c. 2014.
d. The base year cannot be determined from the given information.

B

Suppose a basket of goods and services has been selected to calculate the CPI and 2012 has been chosen as the base year. In 2012, the basket’s cost was $80.00; in 2013, the basket’s cost was $84; and in 2014, the basket’s cost was $87.60. The value of the CPI was
a. 100 in 2012.
b. 105 in 2013.
c. 109.5 in 2014.
d. All of the above are correct.

D

Suppose a basket of goods and services has been selected to calculate the CPI and 2012 has been selected as the base year. In 2012, the basket’s cost was $50; in 2014, the basket’s cost was $51; and in 2016, the basket’s cost was $52. The value of the CPI in 2014 was
a. 98.0.
b. 102.0.
c. 104.0.
d. 151.0.

B

Suppose a basket of goods and services has been selected to calculate the CPI and 2012 has been selected as the base year. In 2012, the basket’s cost was $77; in 2013, the basket’s cost was $82; and in 2014, the basket’s cost was $90. The value of the CPI in 2014 was
a. 109.8 and the inflation rate was 9.8%.
b. 109.8 and the inflation rate was 16.9%.
c. 116.9 and the inflation rate was 9.8%.
d. 116.9 and the inflation rate was 16.9%.

C

The price index was 220 in one year and 238.2 in the next year. What was the inflation rate?
a. 8.3 percent
b. 108.3 percent
c. 4.8 percent
d. 38.2 percent

A

For an imaginary economy, the value of the consumer price index was 140 in 2013 and 146.5 in 2014. The economy’s inflation rate in 2014 was
a. 4.6 percent.
b. 6.5 percent.
c. 4.4 percent.
d. 46.5 percent.

A

. The price index was 150 in the first year, 142.5 in the second year, and 138.2 in the third year. The economy experienced
a. 5.0 percent deflation between the first and second years, and 3.0 percent deflation between the second and third years.
b. 7.5 percent deflation between the first and second years, and 4.3 percent deflation between the second and third years.
c. 5.3 percent inflation between the first and second years, and 4.1 percent inflation between the second and third years.
d. 7.5 percent inflation between the first and second years, and 4.3 percent inflation between the second and third years.

A

Which of the following changes in the price index produces the greatest rate of inflation: 80 to 100, 100 to 120, or 150 to 170?
a. 80 to 100
b. 100 to 120
c. 150 to 170
d. All of these changes produce the same rate of inflation.

A

In an imaginary economy, consumers buy only hot dogs and hamburgers. The fixed basket consists of 10 hot dogs and 6 hamburgers. A hot dog cost $3 in 2006 and $5.40 in 2007. A hamburger cost $5 in 2006 and $6 in 2007. Which of the following statements is correct?
a. When 2006 is chosen as the base year, the consumer price index is 90 in 2007.
b. When 2006 is chosen as the base year, the inflation rate is 150 percent in 2007.
c. When 2007 is chosen as the base year, the consumer price index is 100 in 2006.
d. When 2007 is chosen as the base year, the inflation rate is 50 percent in 2007.

D

The price index was 92 in 2014, and the inflation rate was 8.7 percent between 2013 and 2014. The price index in 2013 was
a. 100.0.
b. 100.7.
c. 83.3.
d. 84.6.

D

The price index that measures the cost of a basket of goods and services bought by firms is called the
a. industrial price index.
b. producer price index.
c. core price index.
d. GDP deflator.

B

In the basket of goods that is used to compute the consumer price index, the three largest categories of consumer spending are
a. housing, transportation, and recreation.
b. housing, transportation, and food & beverages.
c. housing, food & beverages, and education & communication.
d. housing, medical care, and education & communication.

B

. If the cost of housing increases by 10 percent, then, other things the same, the CPI is likely to increase by about
a. 1.7 percent.
b. 3.3 percent.
c. 4.2 percent.
d. 10 percent

C

The consumer price index tires to measure how much consumer incomes must rise in order to maintain a constant
a. level of real GDP.
b. ratio of consumption to GDP.
c. ratio of net exports to GDP.
d. standard of living.

D

Which of the following is not a widely acknowledged problem with using the CPI as a measure of the cost of living?
a. substitution bias
b. introduction of new goods
c. unmeasured quality change
d. unmeasured price change

D

Suppose the price of a quart of milk rises from $1.00 to $1.20 and the price of a T-shirt rises from $8.00 to $9.60. If the CPI rises from 150 to 195, then people likely will buy
a. more milk and more T-shirts.
b. more milk and fewer T-shirts.
c. less milk and more T-shirts.
d. less milk and fewer T-shirts.

A

One problem with the consumer price index stems from the fact that, over time, consumers tend to buy larger quantities of goods that have become relatively less expensive and smaller quantities of goods that have become relatively more expensive. This problem is called
a. price-change neglect.
b. unmeasured quality change.
c. substitution bias.
d. relative bias.

C

When new goods are introduced, consumers have more variety from which to choose. As a result, each dollar is worth
a. more, and the cost of living increases.
b. more, and the cost of living decreases.
c. less, and the cost of living increases.
d. less, and the cost of living decreases.

B

If the quality of a good improves while its price remains the same, then the value of a dollar
a. rises and the cost of living increases.
b. rises and the cost of living decreases.
c. falls and the cost of living increases.
d. falls and the cost of living decreases.

B

For some racquet sports, there have been increases in the size of the racquets; also, the methods and materials used for making racquets have improved. To which problem in the construction of the CPI is this situation most relevant?
a. substitution bias
b. introduction of new goods
c. unmeasured quality change
d. income bias

C

The problems with using the consumer price index as a measure of the cost of living are important because
a. even the appearance of high rates of inflation cause voters to become disenchanted.
b. politicians have manipulated the measurement problems to their advantage.
c. many government programs use the CPI to adjust for changes in the overall level of prices.
d. if the price level is overstated, consumers will be taken advantage of by sellers of consumer goods.

C

The CPI and the GDP deflator
a. generally move together.
b. generally show different patterns of movement.
c. always show identical changes.
d. always show different patterns of movement.

A

The CPI differs from the GDP deflator in that
a. the CPI is a price index, while the GDP deflator is an inflation index.
b. substitution bias is not a problem with the CPI, but it is a problem with the GDP deflator.
c. increases in the prices of foreign produced goods that are sold to U.S. consumers show up in the CPI but not in the GDP deflator.
d. increases in the prices of domestically produced goods that are sold to the U.S. government show up in the CPI but not in the GDP deflator.

C

Assume most athletic apparel bought by U.S. consumers is imported from other nations. If all else is constant, an increase in the price of foreign-made athletic apparel will cause the U.S.
a. consumer price index and GDP deflator to increase by exactly the same amount.
b. GDP deflator to increase more than the consumer price index.
c. consumer price index to increase more than the GDP deflator.
d. GDP deflator to decrease less than the consumer price index.

C

. Which of the following is the most accurate statement?
a. In the 1970s, the late 1980s, 1990s, and 2000s, the GDP deflator and the CPI both showed high rates of inflation.
b. In the 1970s, both the GDP deflator and the consumer price index showed high rates of inflation, and in the late 1980s, 1990s, and 2000s, both measures showed low rates of inflation.
c. In the 1970s, both the GDP deflator and the consumer price index showed low rates of inflation, and in the late 1980s, 1990s, and 2000s, both measures showed high rates of inflation.
d. In the 1970s, the late 1980s, 1990s, and 2000s, the GDP deflator and the CPI both showed low rates of inflation.

B

. Core CPI is
a. the CPI including only food, clothing, and energy.

b. the CPI including only food and energy.

c. the CPI excluding food, clothing, and energy.

d. the CPI excluding food and energy.

D

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

C

The CPI was 172 in 2007, and the CPI was 46.5 in 1982. If your parents put aside $1,000 for you in 1982, then how much would you have needed in 2007 in order to buy what you could have bought with the $1,000 in 1982?
a. $270.35
b. $1,255.00
c. $2,698.92
d. $3,698.92

D

. 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?
a. $5.39
b. $25.00
c. $29.11
d. $37.11

D

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
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.

A

In 1972, one could buy model rocket engines for $1.50 each. If those same engines cost $2.50 each today, then which pair of CPIs would make the engine prices in today’s dollars the same for both years?
a. 60 in 1972 and 95 today
b. 60 in 1972 and 120 today
c. 90 in 1972 and 150 today
d. 96 in 1972 and 154 today

C

Nate collected Social Security payments of $220 a month in 1985. If the price index rose from 90 to 108 between 1985 and 1986, then his Social Security payments for 1986 should have been
a. $228.
b. $238.
c. $257.
d. $264.

D

Jake loaned Elwood $5,000 for one year at a nominal interest rate of 10 percent. After Elwood repaid the loan in full, Jake complained that he could buy 4 percent fewer goods with the money Elwood gave him than he could before he loaned Elwood the $5,000. From this, we can conclude that the rate of inflation during the year was
a. -4 percent.
b. 4 percent.
c. 6 percent.
d. 14 percent.

D

The consumer price index was 200 in 2012 and 208 in 2013. The nominal interest rate during this period was 9 percent. What was the real interest rate during this period?
a. 5.00 percent
b. 1.00 percent
c. 5.15 percent
d. 13.00 percent

A

For which rate of inflation given below will the real interest rate be higher than the nominal interest rate?
a. -0.5%
b. 0.2%

c. 0.5%

d. 1.5%

A

The largest sector in the consumer price index market basket is food and beverage purchases.

False

In a period of inflation real interest rates will be greater than nominal interest rates.

False

Price indexes allow comparisons of dollar figures over time and provide us a sense of how the economy is changing.

True

Persistent increases in the overall level of prices have been the norm

True

Price changes from year to year are not proportional, and consumers respond to these changes by altering their spending patterns. The problem this creates for inflation calculations is called

substitution bias.

One of the differences between the GDP deflator and the consumer price index is

the GDP deflator reflects prices for all goods and services produced domestically and the consumer price index reflects prices for some goods and services bought by consumers.

A 2009 Chevrolet model has more horsepower than the 2008 version and is included in the BLS basket of goods. BLS attempts to account for this change in the market basket by

adjusting the price of the good to account for the quality change.

Which of the following statements regarding the consumer price index and the GDP deflator is correct?

Divergence between the two price measures is the exception, not the rule.

A worker received $5 for a daily wage in 1930. What is the value of that wage today if the CPI was 17 in 1930 and is 215 today?

$63.24

A worker received $5 for a daily wage in 1930, which has the equivalent value of $63.24 today. If the CPI was 17 in 1930 what is the value of the CPI today, rounded to the nearest whole number?

215

The consumer price index was 200 in 2006 and 210 in 2007. The nominal interest rate during this period was 6.5 percent. What was the real interest rate during this period?

1.5 percent

The consumer price index was 200 in 2008 and 190 in 2009. The nominal interest rate during this period was 4.5 percent. What was the real interest rate during this period?

9.5 percent

The nominal interest rate for a consumer loan lasting from 2007 to 2008 is 8.5 percent and the real interest rate is 4.5 percent. If the consumer price index was 200 in 2007, what would the consumer price index value be in 2008?

208

When looking at a graph of nominal and real interest rates you notice the graph for nominal rates and the graph for real rates cross each other many times. From this you conclude

consumer prices sometimes rose and sometimes fell in the time frame represented on the graph.

John just graduated law school and has two competing job offers. The first is in Phoenix and pays a salary of $150,000. He has a similar job offer in Cleveland that pays $90,000. Which pair of CPIs would make the two salaries have the same purchasing power?

70 in Phoenix and 42 in Cleveland

Elizabeth just received her Ph.D. in economics and has two competing job offers. The first is in Washington, D.C. and pays a salary of $200,000. She has a similar job offer in Austin, TX that pays $90,000. Which pair of CPIs would make the two salaries have the same purchasing power?

160 in Washington, D.C. and 72 in Austin, TX

In 1983, one could buy a model radio-controlled airplane for $11.50 each. Those same planes are available today and the price increased at exactly the rate of inflation. If the CPI today is 220.5 and in 1983 was 105, what is the price of the airplane today?

$24.15

Which is the most accurate statement about the GDP deflator and the consumer price index?

The consumer price index compares the price of a fixed basket of goods and services to the price of the basket in the base year, whereas the GDP deflator compares the price of currently produced goods and services to the price of the same goods and services in the base year.

In a particular economy, the price index was 120 in 2012 and 130 in 2013. Which of the following statements is correct?

The economy experienced a rising price level between 2012 and 2013.

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?

A change in the price of Korean televisions is reflected in the U.S. consumer price index but not in the U.S. GDP deflator.

In 1983, one could buy a model radio-controlled airplane for $11.50 each. Those same planes are available today and
the price increased at exactly the rate of inflation. If the CPI today is 220.5 and in 1983 was 105, what is the price of the
airplane today?

$24.15

Suppose Will’s 2010 food expenditures in 2011 dollars amount to $6,235. Then x, the
consumer price index for 2011, has a value of

180.6

Every unit of good x that is produced in the United States is exported to other countries. An increase in the price of
good x shows up

in the GDP deflator, but not in the consumer price index.

For an imaginary economy, the value of the consumer price index was 140 in 2013 and 146.5 in 2014. The economy’s
inflation rate for 2014 was

4.6 percent.

A worker received $5 for a daily wage in 1930, which has the equivalent value of $63.24 today. If the CPI was 17 in
1930 what is the value of the CPI today, rounded to the nearest whole number?

215

In an imaginary economy, consumers buy only sandwiches and magazines. The fixed basket consists of 20 sandwiches and 30 magazines. In 2006, a sandwich cost $4 and a magazine cost $2. In 2007, a sandwich cost $5. The base year is 2006. If the consumer price index in 2007 was 125, then how much did a magazine cost in 2007?

$2.50

For an imaginary economy, the value of the consumer price index was 140 in 2013, and the inflation rate was 5.0 percent between 2013 and 2014. The consumer price index in 2014 was

147.0

In an imaginary economy, consumers buy only hot dogs and hamburgers. The fixed basket consists of 10 hot dogs and 6 hamburgers. A hot dog cost $3 in 2006 and $5.40 in 2007. A hamburger cost $5 in 2006 and $6 in 2007. Which of the following statements is correct?

When 2007 is chosen as the base year, the inflation rate is 50 percent in 2007.

Suppose that in 2010, the producer price index increases by 1.5 percent. As a result, economists most likely will predict that

the consumer price index will increase in the future.

To the nearest dollar, Will’s 2010 food expenditures in 2009 dollars amount to

$5,524

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

104.6 and the inflation rate was 4.6%

If a U.S. citizen buys a television made in Korea by a Korean firm, then

U.S. net exports decrease and U.S. GDP is unaffected.

If in some year nominal GDP was $18 billion and the GDP deflator was 120, what was real GDP?

$15 billion.

During a presidential campaign, the incumbent argues that he should be reelected because nominal GDP grew by 12 percent during his 4-year term in office. You know that population grew by 4 percent over the period and that the GDP deflator increased by 6 percent during the past 4 years. You should conclude that real GDP per person

grew, but by less than 12 percent.

International data on GDP and socioeconomic variables

leave no doubt that a nation’s GDP is closely associated with its citizens’ standard of living.

Which of the following headlines is more closely related to what microeconomists study than to what macroeconomists study?

D) The price of gasoline rises due to rising oil prices.

Which of the following questions is more likely to be studied by a microeconomist than a macroeconomist?

B) Why do wages differ across industries?

Which of the following statistics is usually regarded as the best single measure of a society’s economic well-being?

C) gross domestic product

For an economy as a whole,

C) income must equal expenditure.

In a simple circular-flow diagram, firms use the money they get from a sale to

In a simple circular-flow diagram, firms use the money they get from a sale to, pay rent to landlords, pay profit to the firms’ owners.

According to the circular-flow diagram, GDP

C) can be computed as either the revenue firms receive from the sales of goods and services or as revenues they receive from the sales of goods and services.

Suppose that an economy produces 20,000 units of good A which sells at $3 a unit and 40,000 units of good B which sells at $1 per unit. Production of good A contributes

B) 3/2 times as much to GDP as the production of good B.

Ryan lives in an apartment where he pays $7,000 a year in rent. Sarah lives in a house that could be rented for $21,000 a year. How much do these housing services contribute to GDP?

B) $28,000

A farmer sells $25,000 worth of apples to individuals who take them home to eat, $50,000 worth of apples to a company that uses them all to produce cider, and $75,000 worth of apples to a grocery store that will sell them to households. How much of the farmer’s sales will be included as apples in GDP?

A) $25,000

All of the following are examples of a nondurable good except

C) a queen-size bed.

The value of goods added to a firm’s inventory in a certain year is treated as

C) investment, since GDP aims to measure the value of the economy’s production that year.

The city of Ann Arbor Michigan buys a police car manufactured in Germany. In the GDP accounts this transaction is included in

B) government expenditures and imports.

If nominal GDP is $12 trillion and real GDP is $10 trillion, then the GDP deflator is

C) 120, and this indicates that the price level has increased by 20 percent since the base year.

Suppose an economy produces only iPhones and bananas. In 2010, 1000 iPhones are sold at $300 each and 5000 pounds of bananas are sold at $3 per pound. In 2009, the base year, iPhones sold at $400 each and bananas sold at $2 per pound. For 2010,

A) nominal GDP is $315,000, real GDP is $410,000, and the GDP deflator is 76.83.

A) nominal GDP is $315,000, real GDP is $410,000, and the GDP deflator is 76.83.

the value of leisure, the value of goods and services produced at home, and the quality of the environment.

The consumer price index is used to

B) turn dollar figures into meaningful measures of purchasing power.

Economists use the term inflation to describe a situation in which

B) the economy’s overall price level is rising.

The term inflation is used to describe a situation in which

A) the overall level of prices in the economy is increasing.

The CPI is calculated

monthly

The inflation rate is calculated

D) by determining the percentage increase in the price index from the preceding period.

In an imaginary economy, consumers buy only sandwiches and magazines. The fixed basket consists of 20 sandwiches and 30 magazines. In 2006, a sandwich cost $4 and a magazine cost $2. In 2007, a sandwich cost $5. The base year is 2006. If the inflation rate in 2007 was 16 percent, then how much did a magazine cost in 2007?

B) $2.08

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

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.

David earned a salary of $43,500 in 1994 and $89,000 in 2010. The consumer price index was 148.2 in 1994 and 215.3 in 2010. David’s 1994 salary in 2010 dollars is

C) $63,195.34

Consternation Corporation has an agreement with its workers to index completely the wage of its employees using the CPI. Consternation Corporation currently pays its production line workers $7.50 an hour and is scheduled to index their wages today. If the CPI is currently 130 and was 125 a year ago, the firm should increase the hourly wages of its workers by

C) $0.30.

Inflation can be measured using either the GDP deflator or the consumer price index.

true

The inflation rate reported in the news is usually calculated from the GDP deflator rather than the consumer price index.

false

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

true

The average income in a rich country

C) is more than ten times that in a poor country. Further, people in rich countries have longer life expectancy.

During the past century the average growth rate of U.S. real GDP per person implies that it doubled, on average, about every

C) 35 years.

A country experiencing a growth rate of 12% per year can go from being one of the poorest to one of the richest in

A) one generation. In the last couple of decades China’s growth rate has been higher than 12%.

Average income has been stagnant for many years in

C) some Sub-Saharan African countries.

Productivity is the amount of goods and services

D) produced for each hour of a worker’s time. It is linked to a nation’s economic policies.

A nation’s standard of living is determined by

C) the productivity of its workers.

Which of the following countries had the lowest level of real GDP per person in 2010?

Bangladesh

Mexico is

C) a middle-income country, and over the past century its rate of economic growth has been higher than that of the United States.

In 1870, the richest country in the world was

C) the United Kingdom.

One can argue that the average American today is "richer" than the richest American 100 years ago, given that 100 years ago,

C) many of the goods and services that we now take for granted were not available.

A barber shop produces 192 haircuts a day. Each barber in the shop works 8 hours per day and produces the same number of haircuts per hour. If the shop’s productivity is 2 haircuts per hour of labor, then how many barbers does the shop employ?

12

Adam and Doug both build birdhouses. Adam works 30 hours a week and produces 15 bird houses. Doug works 20 hours a week and produces 12 bird houses. Which of the following is correct?

B) Adam’s production is higher than Doug’s, but Doug’s productivity is higher than Adam’s.

Daniel owns a coffee kiosk. All of his employees work 8 hours per day. In 2011, he employed 6 people who produced a total of 912 cups of coffee each day. In 2012, he hired a seventh employee and production increased to 1008 cups of coffee each day. In Daniel’s kiosk, productivity

D) decreased by about 5.3 percent

Industrial machinery is an example of

A factor of production that in the past was an output from the production process, physical capital, and something that influences productivity.

If a country increases its saving rate, which of the following permanently grow at a higher rate?

D) neither real GDP per person nor productivity

Other things equal, relatively poor countries tend to grow

C) faster than relatively rich countries; this is called the catch-up effect.

Which of the following is correct?

C) Historically, in periods where the rate of population growth was high, so was the rate of growth in world real GDP per person.

All else equal, which of the following would tend to cause real GDP per person to rise?

A change from inward-oriented policies to outward-oriented policies, an increase in investment in human capital, and strengthening of property rights.

According to some estimates, over the last two decades China has had an annual average growth rate of about 12 percent.

true

Since 1870 Canadian and U.S real GDP per person grew from below to above that in the United Kingdom. The explanation for this is likely that productivity grew faster in Canada and the U.S. than in the United Kingdom.

true

Over the period 1890-2010, Japan experienced a 2.65 percent average annual growth rate of real GDP per person.

true

If it could increase its growth rates slightly, a country with low income would catch up with rich countries in about ten years.

false

International data on the history of real GDP growth rates shows that over the last 120 years or so, rich countries got richer and poor countries got poorer.

false

Productivity can be computed as the number of hours worked divided by output.

false

If a production function has constant returns to scale, then if all inputs double so does production.

true

Baseball players in 1931 earned 80,000, now they earn about 400 times that, we can conclude that

once cannot determine whether baseball stars today enjoy a higher standard of living than baseball players back then due to the lack of info on increase price

When the consumer price index falls, the typical family

can spend fewer dollars to maintain the same standard of living

The CPI is more commonly used as a gauge of inflation than GDP deflator because,

the CPI better reflects the goods and services bought by consumers

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

a typical consumer

The CPI is a measure of the overall cost of

the goods and services purchased by a typical consumer

In CPI, goods and services are weighted according to

how much consumers buy of each good or service

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

if consumers buy more tea than beer

In calculating the CPI a fixed basket of goods and services is used. The quantities of the goods and services in the fixed basket are determined by

surveying consumers

if 2012 is the base year then the inflation rate for 2012 equals

B-A/B x 100

If the consumer price index was 96 in 2012 and 100 in 2013 and 102 in 2014, then the base year must be

2013 because the CPI 100 %

Know how to calculate CPI

Baskets from current year/Baskets from base year x 100

how to calculate the inflation rate using CPI

current year- last year/last year x 100

The producer price index measures the cost of a basket of goods and services

bought by firms

The price index that measures the cost of goods and services bought by firs is called the

producer price index

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

is housing

one problem with CPI is that people tend to buy larger quantities of less expensive items and smaller quantities of more expensive items, this is called the

substitution bias

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

when a new good is introduced, it gives consumers greater choice, thus reducing the amount they must spend to maintain their standard of living

If the quality of a good improves while its price remains the same, then the value of a dollar

rises and the cost of living decreases

Lawn mowers

CPI will rise

the GDP deflator reflects the

current level of prices relative to the level prices in the base year

a decrease in the price of domestically produced industrial robots will be reflected in

the GDP deflator but not the consumer price index

The price of milk increases dramatically, causing a 0.5 percent increase in the CPI. The price increases will most likely cause the GDP deflator to increase by

less than 0.5 percent

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

A change in the price of Korean televisions is reflected in the US consumer price index but not in the US GDP deflator

The basket of goods in the consumer price index changes

occasionally, whereas the group of goods used to compute the GDP deflator changes automatically

A 2009 Chevrolet model has more horsepower than the 2008 version and is included in the BLS basket of goods BLS attempts to account for this change in the market basket by

adjusting the price of the good to account for the quality change

Every unit of good X that is produced in the United States is exported to other countries. An increase in the price of good x shows up

in the GDP deflator, but not in the consumer price index