Question 1

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. D

Question 2

Compute how much each of the following items is worth in terms of today's dollars using 177 as the price index for today.
a. In 1926, the CPI was 17.7 and the price of a movie ticket was $0.25.
b. In 1932, the CPI was 13.1 and a cook earned $15.00 a week.
c. In 1943, the CPI was 17.4 and a gallon of gas cost $0.19.

Accepted Answer

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a. The movie ticket is worth $.25 × 177/17.7 = $2.50 in today's dollars.
b. The cook's weekly wage is worth $15.00× 177/13.1 = $202.67 in today's dollars.
c. The gallon of gas is worth $.19 × 177/17.4 = $1.93 in today's dollars.

Question 3

Each week, the Bureau of Labor Statistics computes and reports the consumer price index.

Accepted Answer

A) True 
 B)False  False

Question 4

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

Accepted Answer

A)   shelter.
B)   fuel and other utilities.
C)   household furnishings and operation.
D)   All of the above are correct.

Question 5

Janelle earned a salary of $62,000 in 2004 and $80,000 in 2014. The consumer price index was 126 in 2004 and 170 in 2014. Janelle's 2004 salary in 2014 dollars is

Accepted Answer

A)   $45,953.
B)   $89,280.
C)   $107,953.
D)   $83,651.

Question 6

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 7

Which of the following changes in the price index produces the greatest rate of inflation: 106 to 112, 112 to 118, or 118 to 124?

Accepted Answer

A)   106 to 112
B)   112 to 120
C)   118 to 126
D)   All of these changes produce the same rate of inflation.

Question 8

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 9

Table 24-14
The table below lists the per pound prices of meat and potatoes for the months of January, February, and March. Assume that the typical consumer buys 25 pounds of meat and 15 pounds of potatoes each month, and that January is the base period. 
-Refer to Table 24-14. Calculate the inflation rate for March.

Accepted Answer

The answer of Table 24-14
The table below lists the per...

Question 10

Babe Ruth, the famous baseball player, earned $80,000 in 1931. Today, the best baseball players can earn more than 400 times as much as Babe Ruth earned in 1931. However, prices have also risen since 1931. We can conclude that

Accepted Answer

A)   the best baseball players today are about 400 times better off than Babe Ruth was in 1931.
B)   because prices have also risen, the standard of living of baseball stars hasn't changed since 1931.
C)   one cannot make judgments about changes in the standard of living based on changes in prices and changes in incomes.
D)   one cannot determine whether baseball stars today enjoy a higher standard of living than Babe Ruth did in 1931 without additional information regarding increases in prices since 1931.

Question 11

Table 24-7. The table below applies to an economy with only two goods - hamburgers and hot dogs. The fixed basket consists of 4 hamburgers and 8 hot dogs. 
-Refer to Table 24-7. If the base year is 2009, then the economy's inflation rate is

Accepted Answer

A)   10 percent in 2010 and 6.36 percent in 2011.
B)   10 percent in 2010 and 17 percent in 2011.
C)   9.2 percent in 2010 and 6 percent in 2011.
D)   8.22 percent in 2010 and 5 percent in 2011.

Question 12

Two alternative measures of the overall level of prices are

Accepted Answer

A)   the inflation rate and the consumer price index.
B)   the inflation rate and the GDP deflator.
C)   the GDP deflator and the consumer price index.
D)   the cost of living index and nominal GDP.

Question 13

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.

Question 14

Scenario 24-3
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 2013. The price index was 17.6 in 1944 and 218.4 in 2013.
-Refer to Scenario 24-3. Sue Holloway's 1944 income in 2013 dollars is

Accepted Answer

A)   $23,033.
B)   $136,909.
C)   $148,909.
D)   $240,960.

Question 15

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 1980 salary in 2011 dollars?

Accepted Answer

A)   $5,400
B)   $20,466
C)   $26,158
D)   $41,159

Question 16

If the nominal interest rates rises, then the inflation rate must have increased.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A)   145.0.
B)   147.0.
C)   135.0.
D)   133.3.

Question 18

The price index that measures the cost of a basket of goods and services bought by firms is called the

Accepted Answer

A)   industrial price index.
B)   producer price index.
C)   core price index.
D)   GDP deflator.

Question 19

Between October 2014 and October 2015, the CPI in Canada rose from 120 to 124 and the CPI in Mexico rose from 210 to 229.1. What were the inflation rates for Canada and Mexico over this one-year period?

Accepted Answer

A)   3.3 percent for Canada and 9.1 percent for Mexico
B)   3.3 percent for Canada and 8.3 percent for Mexico
C)   3.2 percent for Canada and 9.1 percent for Mexico
D)   3.2 percent for Canada and 8.3 percent for Mexico

Question 20

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

Accepted Answer

A)   consumer prices sometimes rose and sometimes fell in the time frame represented on the graph.
B)   consumer prices were always rising in the time frame represented on the graph.
C)   the economy never experienced a recession in the time frame represented on the graph.
D)   GDP was always increasing for the time frame represented on the graph.

Exam 24: Measuring the Cost of Living