Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

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.E) A) and B)
F) A) and C)

Question 3

When new goods are introduced, consumers have more variety from which to choose. As a result, each dollar is worth

Accepted Answer

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.E) A) and C)
F) B) and C)

Question 4

Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Bob withdraws his $105. If deflation was 5 percent during the year the money was deposited, then Bob's purchasing power has not changed.

Accepted Answer

A) True 
 B)False

Question 5

In 1970, Professor Plum earned $12,000; in 1980, he earned $24,000; and in 1990, he earned $36,000. If the CPI was 40 in 1970, 70 in 1980, and 130 in 1990, then in real terms, Professor Plum's salary was highest in

Accepted Answer

A)   1970 and lowest in 1980.
B)   1970 and lowest in 1990.
C)   1980 and lowest in 1970.
D)   1980 and lowest in 1990.E) A) and B)
F) All of the above

Question 6

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

Accepted Answer

A)   deflation.
B)   inflation.
C)   unmeasured quality change.
D)   substitution bias.E) None of the above
F) All of the above

Question 7

The CPI and GDP deflator usually tell two different stories about how quickly prices are rising.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A)   The CPI was 100 in 2003, 110 in 2004, and 105 in 2005.
B)   The CPI was 100 in 2003, 120 in 2004, and 135 in 2005.
C)   The CPI was 100 in 2003, 105 in 2004, and 130 in 2005.
D)   The CPI was 100 in 2003, 90 in 2004, and 88 in 2005.E) C) and D)
F) A) and B)

Question 9

The CPI is always 1 in the base year.

Accepted Answer

A) True 
 B)False

Question 10

Table 6-4
The table below pertains to Wrexington, an economy in which the typical consumer's basket consists of 20 pounds of meat and 10 toys.
 
-Refer to Table 6-4. The cost of the basket

Accepted Answer

A)   decreased by $2 from 2004 to 2005.
B)   increased by $3 from 2004 to 2005.
C)   increased by $7 from 2004 to 2005.
D)   increased by $10 from 2004 to 2005.E) B) and C)
F) A) and C)

Question 11

In which of the following cases would there be an effect on the value of the U.S. consumer price index, but not on the value of the U.S. GDP deflator?

Accepted Answer

A)   All of the truck tires that are produced by a certain company in South Korea are sold to the U.S. military, and the price of these tires decreases.
B)   All of the truck tires that are produced by a certain company in California are sold to the U.S. military, and the price of these tires decreases.
C)   Most of the bananas that are produced by a certain company in Honduras end up in U.S. grocery stores, and the price of these bananas increases.
D)   Most of the earth-moving machines that are produced by a certain company in Illinois are exported to other countries, and the price of these machines increases.E) B) and D)
F) B) and C)

Question 12

Which of the following is correct?

Accepted Answer

A)   Nominal and real interest rates always move together.
B)   Nominal and real interest rates never move together.
C)   Nominal and real interest rates do not always move together.
D)   Nominal and real interest rates always move in opposite directions.E) B) and D)
F) A) and B)

Question 13

If the CPI was 110 this year and 100 last year, then

Accepted Answer

A)   the cost of the CPI basket of goods and services increased by 10 percent this year.
B)   the price level increased by 110 percent this year.
C)   the inflation rate for this year was 10 percent higher than the inflation rate for last year.
D)   All of the above are correct.E) None of the above
F) All of the above

Question 14

For an imaginary economy, the consumer price index was 62.50 in 2004, 100.00 in 2005, and 160.00 in 2006. Which of the following statements is correct?

Accepted Answer

A)   If the basket of goods that is used to calculate the CPI cost $80 in 2004, then that basket of goods cost $128 in 2005.
B)   If the basket of goods that is used to calculate the CPI cost $90 in 2005, then that basket of goods cost $150 in 2006.
C)   The overall level of prices increased by 97.5 percent between 2004 and 2006.
D)   All of the above are correct.E) B) and C)
F) C) and D)

Question 15

The content of the basket of goods and services used to compute the CPI changes every month.

Accepted Answer

A) True 
 B)False

Question 16

If the nominal interest rate is 8 percent and the real interest rate is 3.5 percent, then the inflation rate is

Accepted Answer

A)   -4.5 percent.
B)   0.78 percent.
C)   4.5 percent.
D)   11.5 percent.E) None of the above
F) All of the above

Question 17

Scenario 6-2
The price tag on a golf ball in 1975 read $0.20, and the price tag on a golf ball in 2005 read $2.00. The CPI in 1975 was 52.3, and the CPI in 2005 was 191.3.
-Refer to Scenario 6-2. The price of a 1975 golf ball in 2005 dollars is

Accepted Answer

A)   $0.05.
B)   $0.53.
C)   $0.73.
D)   $2.00.E) B) and D)
F) A) and D)

Question 18

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.E) A) and D)
F) All of the above

Question 19

Table 6-3
The table below pertains to Studious, an economy in which the typical consumer's basket consists of 5 books and 10 calculators.
 
-Refer to Table 6-3. If 2006 is the base year, then the consumer price index was

Accepted Answer

A)   100 in 2006, 135 in 2007, and 155 in 2008.
B)   100 in 2006, 270 in 2007, and 310 in 2008.
C)   200 in 2006, 135 in 2007, and 155 in 2008.
D)   200 in 2006, 270 in 2007, and 310 in 2008.E) A) and B)
F) All of the above

Question 20

If the nominal interest rate is 6 percent and the rate of inflation is 4 percent, then the real interest rate is

Accepted Answer

A)   -4 percent.
B)   2 percent.
C)   4 percent.
D)   8 percent.E) A) and B)
F) All of the above

Exam 6: Measuring 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 higher between 2004 and 2005 than it was between 2003 and 2004. Which of the following scenarios is consistent with this assumption?

Correct AnswerverifiedShow Answer

The CPI is always 1 in the base year.

Correct AnswerverifiedShow Answer

If the nominal interest rate is 6 percent and the rate of inflation is 4 percent, then the real interest rate is

Correct AnswerverifiedShow Answer

When new goods are introduced, consumers have more variety from which to choose. As a result, each dollar is worth

Correct AnswerverifiedShow Answer

Table 6-4 The table below pertains to Wrexington, an economy in which the typical consumer's basket consists of 20 pounds of meat and 10 toys. -Refer to Table 6-4. The cost of the basket

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following is correct?

Correct AnswerverifiedShow Answer

Scenario 6-2 The price tag on a golf ball in 1975 read $0.20, and the price tag on a golf ball in 2005 read $2.00. The CPI in 1975 was 52.3, and the CPI in 2005 was 191.3. -Refer to Scenario 6-2. The price of a 1975 golf ball in 2005 dollars is

Correct AnswerverifiedShow Answer

For an imaginary economy, the consumer price index was 62.50 in 2004, 100.00 in 2005, and 160.00 in 2006. Which of the following statements is correct?

Correct AnswerverifiedShow Answer

If the nominal interest rate is 8 percent and the real interest rate is 3.5 percent, then the inflation rate is

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

In which of the following cases would there be an effect on the value of the U.S. consumer price index, but not on the value of the U.S. GDP deflator?

Correct AnswerverifiedShow Answer

The CPI and GDP deflator usually tell two different stories about how quickly prices are rising.

Correct AnswerverifiedShow Answer

Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Bob withdraws his $105. If deflation was 5 percent during the year the money was deposited, then Bob's purchasing power has not changed.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Table 6-3 The table below pertains to Studious, an economy in which the typical consumer's basket consists of 5 books and 10 calculators. -Refer to Table 6-3. If 2006 is the base year, then the consumer price index was

Correct AnswerverifiedShow Answer

In 1970, Professor Plum earned $12,000; in 1980, he earned $24,000; and in 1990, he earned $36,000. If the CPI was 40 in 1970, 70 in 1980, and 130 in 1990, then in real terms, Professor Plum's salary was highest in

Correct AnswerverifiedShow Answer

The content of the basket of goods and services used to compute the CPI changes every month.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

If the CPI was 110 this year and 100 last year, then

Correct AnswerverifiedShow Answer

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