 |
| Chapter 24: Measuring the Cost of Living |
1. Which price index
measures the average price of things purchased by the typical family in an
urban area?
a. GDP deflator
b. producer price index
c. consumer price index
d. minimum wage
2. Which item would
receive the most weight in the consumer price index?
a. salt
b. toothpicks
c. pencils
d. food
3. Which item would
receive the least weight in the consumer price index?
a. brooms
b. automobiles
c. color televisions
d. automobile tires
4. The good that
receives the most weight in the CPI is the good that
a. consumers buy most frequently.
b. has experienced the greatest price increase.
c. has the highest price.
d. consumers spend the largest fraction of their income on.
5. Which of the
following is a reason why the Consumer Price Index (CPI) is not calculated as a
simple average of all prices?
a. Some goods experience large price changes and the CPI
would be too variable if computed by a simple average.
b. Goods differ in their importance in the average
consumer’s budget.
c. Some goods never experience price changes and the CPI
would not be variable enough if computed as a simple average.
d. It would be difficult to compute a price index using a
simple average of all prices.
6. If the price of
the market basket of goods in the base year of 1994 was $20,000 and the price
of the same basket had risen to $22,000 by 1998, the CPI for 1998
a. cannot be calculated.
b. is $12,000.
c. is 200.
d. is 110.
7. Suppose you spend
30 percent of your budget on food, 20 percent on medical care, 40 percent on
rent, 5 percent on entertainment, and 5 percent on miscellaneous items. If the
price of all parts of your budget rises equally in percentage terms, which
would have the most weight on your cost of living increase? (Assume you calculate
your index the same way the CPI is calculated.)
a. food
b. medical care
c. rent
d. entertainment
8. Substitution bias
a. is one factor that causes the CPI to underestimate the
inflation rate.
b. is caused by the poor quality of many imported products.
c. is one of the primary causes of inflation.
d. involves consumer behavior that helps explain why the CPI
overestimates the inflation rate.
9. Improvements in
the quality of consumer goods and services over time
a. cause the CPI to overstate actual inflation.
b. cause the CPI to understate actual inflation.
c. are accounted for in the CPI.
d. are insignificant and thus would not affect the CPI even
if accounted for.
10. Factors that
cause the CPI to exaggerate the inflation rate do not include
a. the tendency of consumers to substitute relatively
cheaper goods for those that have become relatively more expensive.
b. political pressure from unions and retirees on the Bureau
of Labor Statistics to overstate the inflation rate.
c. the introduction of new technologies that make it easier
to obtain the same standard of living.
d. improvements over time on the quality of products.
11. Which of the
following answers would accurately describe the bias in the CPI resulting from
the fact that oil prices suddenly increase?
a. underestimate the cost of living
b. overestimate the cost of living
c. have no bias effect on the CPI
d. could overestimate or underestimate the cost of living,
depending upon the quantity of oil purchased in that year
12. The CPI differs from
the GDP deflator in that the CPI includes
a. raw material prices whereas the GDP deflator does not.
b. only goods whereas the GDP deflator includes both goods
and services.
c. only services whereas the GDP deflator includes both
goods and services.
d. only items the typical household buys, whereas the GDP
deflator includes all goods and services produced in the economy.
13. The CPI differs
from the GDP deflator in that the CPI
a. uses base-year quantities of goods to weight prices.
b. uses current-year quantities of goods to weight prices.
c. is not a weighted price index.
d. always indicates a higher rate of inflation than the GDP
deflator.
14. The GDP deflator
differs from the CPI because the GDP deflator includes goods we __________,
while the CPI includes goods we __________.
a. import; export
b. export; import
c. buy; sell
d. consume; produce
15. If the consumer
price index has a value of 150 today and the base year is 1987, then consumer
prices have
a. increased by 50 percent since 1987.
b. doubled since 1987.
c. more than doubled since 1987.
d. declined 50 percent since 1987.
16. If the consumer
price index has a value of 150 today and the base year is 1987, then it costs
a. $100 today to buy what cost $150 in the base year.
b. $1 today to buy what cost $150 in the base year.
c. $150 today to buy what cost $100 in the base year.
d. $2 today to buy what cost $1 in the base year.
17. Use this table to
find the real wage in 2002.
a. $8.06
b. $8.13
c. $13.00
d. $20.80
18. If the CPI
increases from 100 to 200 and the nominal wage increases from $100 to $400,
what is the change in the real wage in terms of the beginning year’s dollars?
a. $200
b. $400
c. $100
d. –$200
19. The real interest
rate on a loan
a. is the amount that the consumer agrees to pay.
b. is always the same as the nominal rate.
c. is the percentage increase in the lender’s purchasing
power that results from making the loan.
d. decreases as the inflation rate increases.
20. If a lender wants
a real return of 6 percent and she expects inflation to be 4 percent, which of
the following is the nominal interest rate to charge?
a. 4 percent
b. 6 percent
c. 2 percent
d. 10 percent
21. Suppose that a
labor union leader is trying to bargain for an increase in union workers’ real
wages of 5 percent. If she expected the price level to rise at a rate of 3
percent this year, how much would nominal wages need to increase for her to
accomplish her objective?
a. 2 percent
b. 3 percent
c. 5 percent
d. 8 percent
22. When borrowing
money to purchase an automobile, Wei has the choice between a fixed nominal
interest rate or adjustable nominal interest rate loan. Typically the
adjustable rate loans start with a lower rate than the fixed rate loans. Given
that, Wei would most likely want to borrow money at the higher fixed rate when
she expects the
a. inflation rate to rise.
b. inflation rate to fall.
c. inflation rate to remain unchanged.
d. government to take action to lower the inflation rate in
the near future.
23. If you borrow
money at a nominal interest rate of 5 percent and the inflation rate is 10
percent, what real interest rate will you pay?
a. –5 percent
b. .5 percent
c. 2 percent
d. 10 percent
24. When the
inflation rate ends up being lower than expected,
a. everyone benefits because money is cheaper.
b. everyone benefits because prices do not increase.
c. lenders of fixed-rate mortgages generally benefit because
they will make higher profits than they had calculated.
d. borrowers with fixed-rate loans will benefit because
their purchasing power will not decline as much.
25. In general, a
higher-than-anticipated inflation rate
a. helps everyone.
b. hurts everyone.
c. helps creditors and harms debtors.
d. helps debtors and harms creditors.
No comments