Question 1

If the CPI was 90 in 1975 and is 225 today, then $100 today purchases the same amount of goods and services as

Accepted Answer

A) $25.00 purchased in 1975. 
B) $33.33 purchased in 1975. 
C) $40.00 purchased in 1975. 
D) $135.55 purchased in 1975. 
A) $25.00 purchased in 1975. 
B) $33.33 purchased in 1975. 
C) $40.00 purchased in 1975. 
D) $135.55 purchased in 1975.

Question 2

Table 11-12. Will's expenditures on food for three consecutive years, along with other values, are presented in the table below.  
-Refer to Table 11-12. Suppose the consumer price index is 15.5 percent higher in 2011 than in 2009. Then Will's food expenditures for 2010 in 2011 dollars amount to

Accepted Answer

A) $6,352. 
B) $6,380. 
C) $6,426. 
D) $6,651. 
A) $6,352. 
B) $6,380. 
C) $6,426. 
D) $6,651.

Question 3

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. 
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.

Question 4

When we express Babe Ruth's 1931 salary in today's dollars and compare his salary to those of current New York Yankee players, we find that the current median salary of today's Yankees is

Accepted Answer

A) about three quarters of Ruth's salary. 
B) about the same as Ruth's salary. 
C) about twice Ruth's salary. 
D) more than four times Ruth's salary. 
A) about three quarters of Ruth's salary. 
B) about the same as Ruth's salary. 
C) about twice Ruth's salary. 
D) more than four times Ruth's salary.

Question 5

When some dollar amount is automatically corrected for inflation by law or contract, the amount is said to be indexed for inflation.

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A) -4 percent. 
B) 4 percent. 
C) 6 percent. 
D) 14 percent. 
A) -4 percent. 
B) 4 percent. 
C) 6 percent. 
D) 14 percent.

Question 7

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. 
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.

Question 8

What basket of goods and services is used to construct the CPI?

Accepted Answer

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 
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

Question 9

Scenario 11-3
Sue Holloway was an accountant in 1944 and earned $12,000 that year. Her son, Josh Holloway, is an accountant today and he earned $210,000 in 2008. The price index was 17.6 in 1944 and 184 in 2008.
-Refer to Scenario 11-3. Josh Holloway's 2008 income in 1944 dollars is

Accepted Answer

A) $11,931.82. 
B) $20,086.96. 
C) $1,985,454.55. 
D) $2,195,454.55. 
A) $11,931.82. 
B) $20,086.96. 
C) $1,985,454.55. 
D) $2,195,454.55.

Question 10

If the nominal interest rate is 4 percent and the real interest rate is -2.5 percent, then the inflation rate is

Accepted Answer

A) -6.5 percent. 
B) -1.5 percent. 
C) 1.5 percent. 
D) 6.5 percent. 
A) -6.5 percent. 
B) -1.5 percent. 
C) 1.5 percent. 
D) 6.5 percent.

Question 11

Suppose the CPI was 108 in 1967, and suppose one must spend $936 today to obtain the same basket of goods and services that could be bought for $200 in 1967. Then today's CPI is

Accepted Answer

A) 116.67. 
B) 131.08. 
C) 397.44. 
D) 505.44. 
A) 116.67. 
B) 131.08. 
C) 397.44. 
D) 505.44.

Question 12

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

Accepted Answer

A) understates the cost of living. 
B) overstates the cost of living. 
C) may overstate or understate the cost of living, depending on how quickly prices rise. 
D) may overstate or understate the cost of living, regardless of how quickly prices rise. 
A) understates the cost of living. 
B) overstates the cost of living. 
C) may overstate or understate the cost of living, depending on how quickly prices rise. 
D) may overstate or understate the cost of living, regardless of how quickly prices rise.

Question 13

Samantha goes to the grocery store to make her monthly purchase of ginger ale. As she enters the soft drink section, she notices that the price of ginger ale has increased 15 percent, so she decides to buy some peppermint tea instead. To which problem in the construction of the CPI is this situation most relevant?

Accepted Answer

A) substitution bias 
B) introduction of new goods 
C) unmeasured quality change 
D) income effect 
A) substitution bias 
B) introduction of new goods 
C) unmeasured quality change 
D) income effect

Question 14

In the late 1970s, U.S. nominal interest rates were high and real interest rates were low, but in the late 1990s, U.S. nominal interest rates were low and real interest rates were high.

Accepted Answer

A) True 
 B)False

Question 15

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. 
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.

Question 16

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?

Accepted Answer

A) $23,040 
B) $52,000 
C) $79,200 
D) $100,000 
A) $23,040 
B) $52,000 
C) $79,200 
D) $100,000

Question 17

Scenario 11-1
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 11-1. 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. 
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.

Question 18

Which of the following is the most accurate statement?

Accepted Answer

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. 
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.

Question 19

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. 
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.

Question 20

If the nominal interest rate is 8 percent and the rate of inflation is 3 percent, then the real interest rate is

Accepted Answer

A) -5 percent. 
B) 1.67 percent. 
C) 5 percent. 
D) 11 percent. 
A) -5 percent. 
B) 1.67 percent. 
C) 5 percent. 
D) 11 percent.

Exam 11: Measuring the Cost of Living

If the CPI was 90 in 1975 and is 225 today, then $100 today purchases the same amount of goods and services as

Table 11-12. Will's expenditures on food for three consecutive years, along with other values, are presented in the table below. -Refer to Table 11-12. Suppose the consumer price index is 15.5 percent higher in 2011 than in 2009. Then Will's food expenditures for 2010 in 2011 dollars amount to

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?

When we express Babe Ruth's 1931 salary in today's dollars and compare his salary to those of current New York Yankee players, we find that the current median salary of today's Yankees is

When some dollar amount is automatically corrected for inflation by law or contract, the amount is said to be indexed for inflation.

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

What basket of goods and services is used to construct the CPI?

Scenario 11-3 Sue Holloway was an accountant in 1944 and earned $12,000 that year. Her son, Josh Holloway, is an accountant today and he earned $210,000 in 2008. The price index was 17.6 in 1944 and 184 in 2008. -Refer to Scenario 11-3. Josh Holloway's 2008 income in 1944 dollars is

If the nominal interest rate is 4 percent and the real interest rate is -2.5 percent, then the inflation rate is

Suppose the CPI was 108 in 1967, and suppose one must spend $936 today to obtain the same basket of goods and services that could be bought for $200 in 1967. Then today's CPI is

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

In the late 1970s, U.S. nominal interest rates were high and real interest rates were low, but in the late 1990s, U.S. nominal interest rates were low and real interest rates were high.

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

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?

Scenario 11-1 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 11-1. In 1975 dollars, a 1975 tennis ball cost $0.10 and a 2005 tennis ball cost

Which of the following is the most accurate statement?

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

If the nominal interest rate is 8 percent and the rate of inflation is 3 percent, then the real interest rate is

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply, Demand, and Government Policies

Consumers, Producers, and the Efficiency of Markets

Application: The Costs of Taxation

Application: International Trade

Measuring a Nations Income

Production and Growth

Saving, Investment, and the Financial System

The Basic Tools of Finance

Unemployment

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomic Models

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Trade-Off Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

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