Question 1

Scenario 24-5
Suppose the residents of Mediaville spend all of their income on books, CDs, and DVDs. In 2009, they buy 400 books for $3,200, 200 CDs for $1,400, and 100 DVDs for $900. In 2010, they buy 360 books for $3,240, 250 CDs for $1,500, and 125 DVDs for $1,250. Assume that the market basket for the CPI is defined in the base year.
-Refer to Scenario 24-5. Using 2009 as the base year, what is the CPI in each year?

Accepted Answer

The answer of Scenario 24-5
Suppose the residents of Mediaville spend...

Question 2

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

Question 3

Suppose a basket of goods and services has been selected to calculate the CPI. In 2002, the basket's cost was $80; in 2008, the basket's cost was $92; and in 2010, the basket's cost was $108. The base year must be

Accepted Answer

A)  2002. 
B)  2008. 
C)  one of the years between 2008 and 2010. 
D)  The base year cannot be determined from the given information.

Question 4

Iggie took a university teaching job as an assistant professor in 1980 at a salary of $15,000. By 2011, she had been promoted to full professor, with a salary of $70,000. If the price index was 82 in 1980 and 225 in 2011, then what is Iggie's 2011 salary in 1980 dollars?

Accepted Answer

A)  $25,511 
B)  $52,073 
C)  $40,140 
D)  $41,159

Question 5

Explain how the prices of goods and services used in the CPI differ from the prices reflected by GDP deflator.

Accepted Answer

The answer of Explain how the prices of goods and...

Question 6

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

Accepted Answer

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.

Question 7

Which of the following statements is correct?

Accepted Answer

A)  In order to calculate the inflation rate for the year 2011, we need to know the values of the consumer price index for the years 2009, 2010, and 2011. 
B)  Changes in the consumer price index are often thought to be useful in predicting changes in the producer price index. 
C)  Despite its name, the "consumer price index" really measures the overall cost of the goods and services bought by consumers, business firms, and units of government. 
D)  If the prices of all goods and services changed proportionately over time, then the consumer price index would reflect no substitution bias.

Question 8

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 $8.00 an hour and is scheduled to index their wages today. If the CPI is currently 160 and was 128 a year ago, the firm should increase the hourly wages of its workers by

Accepted Answer

A)  $0.25. 
B)  $1.60. 
C)  $2.00. 
D)  $2.56.

Question 9

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.

Question 10

By keeping the basket of goods and services the same when computing the CPI, the Bureau of Labor Statistics isolates the effects of price changes from the effect of any quantity changes that might be occurring at the same time.

Accepted Answer

A) True 
 B)False

Question 11

What is the difference between the Consumer Price Index and the Producer Price Index?

Accepted Answer

The answer of What is the difference between the Consumer...

Question 12

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.

Accepted Answer

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.

Question 13

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

Accepted Answer

A)  The economy experienced a rising price level between 2012 and 2013. 
B)  The economy experienced a higher inflation rate between 2012 and 2013 than it had experienced between 2011 and 2012. 
C)  The inflation rate between 2012 and 2013 was 10 percent. 
D)  The base year is 2011.

Question 14

List the three major problems in using the CPI as a measure of the cost of living.

Accepted Answer

The answer of List the three major problems in using...

Question 15

The real interest rate measures the change in dollar amounts.

Accepted Answer

A) True 
 B)False

Question 16

Table 24-3
The table below pertains to Iowan, an economy in which the typical consumer's basket consists of 4 pounds of pork and 3 bushels of corn.
 
-Refer to Table 24-3. If 2012 is the base year, then the CPI for 2012 was

Accepted Answer

A)  75.3. 
B)  100.0. 
C)  116.0. 
D)  132.8.

Question 17

Jay and Joyce meet George, the banker, to work out the details of a mortgage. They all expect that inflation will be 2 percent over the term of the loan, and they agree on a nominal interest rate of 6 percent. As it turns out, the inflation rate is 5 percent over the term of the loan.
a. What was the expected real interest rate?
b. What was the actual real interest rate?
c. Who benefited and who lost because of the unexpected inflation?

Accepted Answer

The answer of Jay and Joyce meet George, the banker,...

Question 18

During a certain year, the nominal interest rate was 8 percent, the real interest rate was 3 percent, and the CPI was 176.7 at the beginning of the year. The CPI at the end of the year was

Accepted Answer

A)  196.1. 
B)  185.5. 
C)  168.3. 
D)  159.2.

Question 19

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

Accepted Answer

A)  106.0. 
B)  104.0. 
C)  111.5. 
D)  116.0.

Question 20

Suppose the Tooth Fairy paid 50 cents for a tooth in 1970. The CPI in 1970 was 38.8, while the CPI in 2010 was 218.1. What is the value of the Tooth Fairy's payment in 2010 dollars?

Accepted Answer

The answer of Suppose the Tooth Fairy paid 50 cents...

Exam 6: Measuring the Cost of Living