chapter 24

Chapter 24 Measuring the Cost of Living TRUE/FALSE The consumer price index is used to monitor changes in an economy’s production of goods and services over time. ANS: F DIF: 2 REF: 24-0 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI MSC: Interpretive 1. 2. When the consumer price index falls, the typical family has to spend fewer dollars to maintain the same standard of living. ANS: T DIF: 2 REF: 24-0 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI MSC: Interpretive 3. Economists use the term inflation to describe a situation in which the economy’s overall price level is rising. ANS: T DIF: 1 REF: 24-0 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation MSC: Definitional 4. The inflation rate is the absolute change in the price level from the previous period. ANS: F DIF: 1 REF: 24-0 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate MSC: Definitional 5. Inflation can be measured using either the GDP deflator or the consumer price index. ANS: T DIF: 2 REF: 24-0 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation | CPI | GDP deflator MSC: Interpretive 6. The inflation rate reported in the news is usually calculated from the GDP deflator rather than the consumer price index. ANS: F DIF: 2 REF: 24-0 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate | CPI | GDP deflator MSC: Interpretive 7. Because the consumer price index reflects the goods and services bought by consumers better than the GDP deflator does, it is the more common gauge of inflation. ANS: T DIF: 1 REF: 24-0 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation | CPI | GDP deflator MSC: Definitional 8. The CPI is a measure of the overall cost of the goods and services bought by a typical consumer. ANS: T DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI MSC: Definitional 9. Each week, the Bureau of Labor Statistics computes and reports the consumer price index. ANS: F DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI MSC: Definitional 10. The Bureau of Labor Statistics is part of the U.S. Department of Labor. ANS: T DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Bureau of Labor Statistics MSC: Definitional 1619 1620  Chapter 24/Measuring the Cost of Living 11. The Bureau of Labor Statistics determines which prices are most important to the typical consumer by surveying consumers. ANS: T DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Bureau of Labor Statistics MSC: Definitional 12. The content of the basket of goods and services used to compute the CPI changes every month. ANS: F DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI MSC: Interpretive 13. 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. ANS: T DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI MSC: Definitional 14. When the consumer price index is computed, the base year is always the first year among the years being considered. ANS: F DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI MSC: Interpretive 15. The CPI for 2008 is computed by dividing the price of the basket of goods and services in 2008 by the price of the basket of goods and services in the base year, then multiplying by 100. ANS: T DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI MSC: Interpretive 16. The CPI is always 1 in the base year. ANS: F DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI MSC: Definitional 17. If the current year CPI is 140, then the price level has increased 40 percent since the base year. ANS: T DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI MSC: Applicative 18. If the current year CPI is 90, then the price level has decreased 10 percent since the base year. ANS: T DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI MSC: Applicative 19. The inflation rate for 2007 is computed by dividing (the CPI in 2007 minus the CPI in 2006) by the CPI in 2006, then multiplying by 100. ANS: T DIF: 2 REF: 24-1 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate MSC: Interpretive 20. If the value of the consumer price index is 110 in 2005 and 121 in 2006, then the inflation rate is 11 percent for 2006. ANS: F DIF: 2 REF: 24-1 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate MSC: Applicative Chapter 24/Measuring the Cost of Living  1621 21. The producer price index measures the cost of a basket of goods and services bought by firms rather than consumers. ANS: T DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: PPI MSC: Definitional 22. Changes in the consumer price index are useful in predicting changes in the producer price index. ANS: F DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | PPI MSC: Interpretive 23. Data from the Bureau of Labor Statistics show that the largest category of consumer spending is housing. ANS: T DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Categories of consumer spending MSC: Definitional 24. Data from the Bureau of Labor Statistics show that consumer spending on transportation is only slightly higher than consumer spending on food and beverages. ANS: T DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Categories of consumer spending MSC: Definitional 25. Data from the Bureau of Labor Statistics show that consumer spending on medical care is about equal to consumer spending on recreation and consumer spending on education and communication. ANS: T DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Categories of consumer spending MSC: Definitional Data from the Bureau of Labor Statistics show that apparel makes up 14 percent of the typical consumer’s budget. ANS: F DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Categories of consumer spending MSC: Definitional 26. 27. The goal of the consumer price index is to gauge how much incomes must rise to maintain a constant standard of living. ANS: T DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI MSC: Definitional 28. Substitution bias occurs because the CPI ignores the possibility of consumer substitution toward goods that have become relatively less expensive. ANS: T DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Substitution bias MSC: Interpretive 29. Substitution bias causes the CPI to understate the increase in the cost of living from one year to the next. ANS: F DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Substitution bias MSC: Definitional 30. When a new good is introduced, consumers have more variety from which to choose, and this in turn increases the cost of maintaining the same level of economic well-being. ANS: F DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Introduction of new goods MSC: Definitional 31. The CPI does not reflect the increase in the value of the dollar that arises from the introduction of new goods. ANS: T DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Introduction of new goods MSC: Definitional 1622  Chapter 24/Measuring the Cost of Living 32. If the quality of a good deteriorates from one year to the next while its price remains the same, then the value of a dollar falls. ANS: T DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Quality change MSC: Definitional 33. The Bureau of Labor Statistics does not try to account for quality changes in the goods and services in the basket used to compute the CPI. ANS: F DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Quality change MSC: Interpretive 34. There is no longer much debate among economists concerning the severity of and the solution to the problems in using the CPI to measure the cost of living. ANS: F DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI MSC: Interpretive 35. Many economists believe the bias in the CPI is now only about half as large as it once was. ANS: T DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI MSC: Definitional 36. The CPI and GDP deflator usually tell two different stories about how quickly prices are rising. ANS: F DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Interpretive 37. When the price of Italian wine rises, this change is reflected in the U.S. CPI but not in the U.S. GDP deflator. ANS: T DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Applicative 38. When the price of nuclear missiles rises, this change is reflected in the CPI but not in the GDP deflator. ANS: F DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Applicative 39. In the U.S., when the price of oil rises, the CPI rises by much more than does the GDP deflator. ANS: T DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Applicative 40. The group of goods and services used to compute the GDP deflator changes automatically over time, but the group of goods and services used to compute the CPI does not. ANS: T DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Applicative 41. The purpose of measuring the overall level of prices in the economy is to permit comparison between dollar figures from different times. ANS: T DIF: 1 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Definitional 42. A dollar figure from 1908 is converted into 2008 dollars by dividing the 2008 price level by the 1908 price level, then multiplying by the 1908 dollar figure. ANS: T DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Interpretive Chapter 24/Measuring the Cost of Living  1623 43. If the CPI today is 120 and the CPI five years ago was 80, then something that cost $1 five years ago would cost $1.50 in today's prices. ANS: T DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 44. Henry Ford paid his workers $5 a day in 1914, when the CPI was 10. Today, with the price index at 177, the $5 a day is worth $88.50. ANS: T DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 45. If you currently make $25,000 a year and the CPI rises from 110 today to 150 in five years, then you need to be making $43,333.33 in five years to have kept pace with consumer price inflation. ANS: F DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 46. When some dollar amount is automatically corrected for inflation by law or contract, the amount is said to be indexed for inflation. ANS: T DIF: 1 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Indexation MSC: Definitional 47. A COLA automatically raises the wage when the CPI rises. ANS: T DIF: 1 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: COLA MSC: Definitional 48. The U.S. income tax system is completely indexed for inflation. ANS: F DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Indexation MSC: Interpretive 49. Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Bob withdraws his $105. If inflation was 2 percent during the year the money was deposited, then Bob’s purchasing power has increased by 3 percent. ANS: T DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Real interest rate MSC: Applicative 50. Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Bob withdraws his $105. If inflation was 5 percent during the year the money was deposited, then Bob’s purchasing power has not changed. ANS: T DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Real interest rate MSC: Applicative 51. Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Bob withdraws his $105. If inflation was 7 percent during the year the money was deposited, then Bob’s purchasing power has increased by 2 percent. ANS: F DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Real interest rate MSC: Applicative 52. 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. ANS: F DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Real interest rate MSC: Applicative 1624  Chapter 24/Measuring the Cost of Living 53. 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 7 percent during the year the money was deposited, then Bob’s purchasing power has increased by 12 percent. ANS: T DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Real interest rate MSC: Applicative 54. The real interest rate measures the change in dollar amounts. ANS: F DIF: 1 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Nominal interest rate MSC: Definitional 55. The real interest rate is the interest rate corrected for inflation. ANS: T DIF: 1 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Real interest rate MSC: Definitional 56. The nominal interest rate tells you how fast the number of dollars in your bank account rises over time. ANS: T DIF: 1 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Nominal interest rate MSC: Definitional 57. The real interest rate tells you how fast the purchasing power of your bank account rises over time. ANS: T DIF: 1 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Real interest rate MSC: Definitional 58. If the nominal interest rates rises, then the inflation rate must have increased. ANS: F DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Nominal interest rate | Inflation rate MSC: Interpretive 59. If the nominal interest rate is 5 percent and the inflation rate is 2 percent, then the real interest rate is 7 percent. ANS: F DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Real interest rate MSC: Applicative 60. If the nominal interest rate is 5 percent and the real interest rate is 2 percent, then the inflation rate is 3 percent. ANS: T DIF: 2 REF: 24-2 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate MSC: Applicative 61. If the real interest rate is 5 percent and the inflation rate is 2 percent, then the nominal interest rate is 7 percent. ANS: T DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Nominal interest rate MSC: Applicative 62. The value of the consumer price index increased from 140 to 147 during 2006. Nathan opened a bank account at the beginning of 2006, and at the end of 2006 his account balance was $12,840. The purchasing power of Nathan’s account increased by 2 percent during the year. We can conclude that Nathan opened his account with a deposit of $11,500 at the beginning of 2006. ANS: F DIF: 3 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Nominal interest rate | Real interest rate MSC: Analytical 63. The U.S. economy has experienced rising consumer prices in every year since 1965. ANS: T DIF: 1 REF: 24-2 NAT: Analytic LOC: Unemployment and inflation TOP: U.S. inflation MSC: Definitional Chapter 24/Measuring the Cost of Living  1625 64. The U.S. economy has never experienced deflation. ANS: F DIF: 2 REF: 24-2 NAT: Analytic LOC: Unemployment and inflation MSC: Interpretive TOP: U.S. inflation 65. 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. ANS: T DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: U.S. interest rates MSC: Interpretive SHORT ANSWER 1. In a simple economy, people consume only 2 goods, food and clothing. The market basket of goods used to compute the CPI consists of 50 units of food and 10 units of clothing. 2002 price per unit 2003 price per unit Food $4 $6 Clothing $10 $20 a. b. c. What are the percentage increases in the price of food and in the price of clothing? What is the percentage increase in the CPI? Do these price changes affect all consumers to the same extent? Explain. a. The price of food increased by 50 percent ([6-4]/4 x 100). The price of clothing increased by 100 percent ([20-10]/10 x 100). In 2002, the market basket cost $300 (4x50 + 10x10); in 2003, it cost $500 (6x50 + 20x10). The percentage increase in the CPI is 66.7 percent ([500-300]/300 x 100). Because the price of clothing increased relatively more than the price of food, people who purchase a lot of clothing and little food became worse off relative to people who purchase a lot of food and little clothing. ANS: b. c. DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics MSC: Applicative 2. TOP: CPI Which is likely to have the larger effect on the CPI, a 2 percent increase in the price of food or a 3 percent increase in the price of diamond rings? Explain. ANS: The 2 percent increase in the price of food will increase the CPI by more because the portion of the market basket consisting of food is much larger than the portion consisting of diamond rings. DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics MSC: Interpretive TOP: CPI 3. List the three major problems in using the CPI as a measure of the cost of living. ANS: (1) Substitution bias. The CPI ignores the fact that consumers substitute toward goods that have become relatively less expensive. (2) Introduction of new goods. Because the CPI uses a fixed basket of goods, it does not take into account the increased well-being of consumers created when new goods are introduced. (3) Unmeasured quality change. Not all quality changes can be measured. DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics MSC: Interpretive TOP: CPI 1626  Chapter 24/Measuring the Cost of Living 4. Why does the GDP deflator give a different rate of inflation than the CPI? ANS: The GDP deflator and the CPI differ in two important ways. The GDP deflator uses as a basket all final goods and services produced in the domestic economy, while the CPI basket includes goods and services purchased by typical consumers. Therefore, changes in the price of imported goods affect the CPI, but not the GDP deflator. Also, changes in the price of domestically produced capital goods affect the GDP deflator, but not the CPI. Changes in the price of domestically produced consumer goods are likely to affect the CPI more than the GDP deflator because it is likely that those goods make up a larger part of consumer budgets than of GDP. DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics MSC: Interpretive 5. TOP: CPI | GDP deflator 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. ANS: a. b. c. The movie ticket is worth $.25 177/17.7 = $2.50 in today's dollars. The cook’s weekly wage is worth $15.00 177/13.1 = $202.67 in today's dollars. The gallon of gas is worth $.19 177/17.4 = $1.93 in today's dollars. DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics MSC: Applicative 6. TOP: Comparing dollar figures 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? ANS: a. b. c. The expected real interest rate was 4 percent (6-2). The actual real interest rate was 1 percent (6-5). George, the banker, lost because he received less real interest income than he expected. Jay and Joyce gained because they paid less real interest income than they expected. DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics MSC: Applicative TOP: Real interest rate Sec00 - Measuring the Cost of Living MULTIPLE CHOICE 1. Babe Ruth, the famous baseball player, earned $80,000 in 1931. Today, the best baseball players can earn more than 300 times as much as Babe Ruth earned in 1931. However, prices have also risen since 1931. We can conclude that a. the best baseball players today are about 300 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. ANS: D DIF: 2 REF: 24-0 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Prices | Standard of living MSC: Interpretive Chapter 24/Measuring the Cost of Living  1627 2. The consumer price index is used to a. monitor changes in the level of wholesale prices in the economy. b. monitor changes in the cost of living over time. c. monitor changes in the level of real GDP over time. d. monitor changes in the stock market. ANS: B NAT: Analytic TOP: CPI 3. The consumer price index is used to a. convert nominal GDP into real GDP. b. turn dollar figures into meaningful measures of purchasing power. c. characterize the types of goods and services that consumers purchase. d. measure the quantity of goods and services that the economy produces. ANS: B NAT: Analytic TOP: CPI 4. DIF: 1 REF: 24-0 LOC: The study of economics and definitions of economics MSC: Definitional Which of the following is not correct? a. The consumer price index gives economists a way of turning dollar figures into meaningful measures of purchasing power. b. The consumer price index is used to monitor changes in the cost of living over time. c. The consumer price index is used by economists to measure the inflation rate. d. The consumer price index is used to measure the quantity of goods and services that the economy is producing. ANS: D NAT: Analytic TOP: CPI 5. DIF: 1 REF: 24-0 LOC: The study of economics and definitions of economics MSC: Definitional DIF: 2 REF: 24-0 LOC: The study of economics and definitions of economics MSC: Interpretive When the consumer price index rises, the typical family a. has to spend more dollars to maintain the same standard of living. b. can spend fewer dollars to maintain the same standard of living. c. finds that its standard of living is not affected. d. can offset the effects of rising prices by saving more. ANS: A DIF: 1 REF: 24-0 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Standard of living MSC: Definitional 6. When the consumer price index falls, the typical family a. has to spend more dollars to maintain the same standard of living. b. can spend fewer dollars to maintain the same standard of living. c. finds that its standard of living is not affected. d. can save less because they do not need to offset the effects of rising prices. ANS: B DIF: 2 REF: 24-0 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Standard of living MSC: Interpretive 7. Economists use the term inflation to describe a situation in which a. some prices are rising faster than others. b. the economy's overall price level is rising. c. the economy's overall price level is high, but not necessarily rising. d. the economy's overall output of goods and services is rising faster than the economy's overall price level. ANS: B NAT: Analytic MSC: Definitional DIF: 1 REF: 24-0 LOC: Unemployment and inflation TOP: Inflation 1628  Chapter 24/Measuring the Cost of Living 8. The term inflation is used to describe a situation in which a. the overall level of prices in the economy is increasing. b. incomes in the economy are increasing. c. stock-market prices are rising. d. the economy is growing rapidly. ANS: A NAT: Analytic MSC: Definitional 9. TOP: Inflation DIF: 1 REF: 24-0 LOC: Unemployment and inflation TOP: Inflation rate DIF: 1 REF: 24-0 LOC: Unemployment and inflation TOP: Inflation rate The inflation rate you are likely to hear on the nightly news is calculated from a. the GDP deflator. b. the CPI. c. the Dow Jones Industrial Average. d. the unemployment rate. ANS: B NAT: Analytic MSC: Interpretive 13. DIF: 1 REF: 24-0 LOC: Unemployment and inflation The economy's inflation rate is the a. price level in the current period. b. change in the price level from the previous period. c. change in the gross domestic product from the previous period. d. percentage change in the price level from the previous period. ANS: D NAT: Analytic MSC: Definitional 12. Inflation The inflation rate is defined as the a. price level in an economy. b. change in the price level from one period to the next. c. percentage change in the price level from the previous period. d. price level minus the price level from the previous period. ANS: C NAT: Analytic MSC: Definitional 11. TOP: When the overall level of prices in the economy is increasing, economists say that the economy is experiencing a. economic growth. b. stagflation. c. inflation. d. deflation. ANS: C NAT: Analytic MSC: Definitional 10. DIF: 1 REF: 24-0 LOC: Unemployment and inflation DIF: 2 REF: 24-0 LOC: Unemployment and inflation TOP: Inflation rate Which of the following is correct? a. The GDP deflator is better than the CPI at reflecting the goods and services bought by consumers. b. The CPI is better than the GDP deflator at reflecting the goods and services bought by consumers. c. The GDP deflator and the CPI are equally good at reflecting the goods and services bought by consumers. d. The GDP deflator is more commonly used as a gauge of inflation than the CPI is. ANS: B DIF: 2 REF: 24-0 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Interpretive Chapter 24/Measuring the Cost of Living  1629 14. The CPI is more commonly used as a gauge of inflation than the GDP deflator is because a. the CPI is easier to measure. b. the CPI is calculated more often than the GDP deflator is. c. the CPI better reflects the goods and services bought by consumers. d. the GDP deflator cannot be used to gauge inflation. ANS: C DIF: 2 REF: 24-0 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Interpretive Sec01 - Measuring the Cost of Living - The Consumer Price Index MULTIPLE CHOICE 1. The CPI is a measure of the overall cost of a. the inputs purchased by a typical producer. b. the goods and services purchased by a typical consumer. c. the goods and services produced in the economy. d. the stocks on the New York Stock Exchange. ANS: B NAT: Analytic TOP: CPI 2. The CPI is a measure of the overall cost of the goods and services bought by a. a typical firm. b. the government. c. a typical consumer. d. All of the above are correct. ANS: C NAT: Analytic TOP: CPI 3. DIF: 1 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Definitional The CPI is a measure of the overall cost of the goods and services bought by a. a typical consumer, and the CPI is computed and reported by the Department of the Treasury. b. typical consumers and typical business firms, and the CPI is computed and reported by the Department of the Treasury. c. a typical consumer, and the CPI is computed and reported by the Bureau of Labor Statistics. d. typical consumers and typical business firms, and the CPI is computed and reported by the Bureau of Labor Statistics. ANS: C NAT: Analytic TOP: CPI 4. DIF: 1 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Definitional DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Interpretive Which of the following agencies calculates the CPI? a. the National Price Board b. the Department Of Weight and Measurements c. the Bureau of Labor Statistics d. the Congressional Budget Office ANS: C DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Bureau of Labor Statistics MSC: Definitional 5. Which entity within the U.S. government is responsible for computing and reporting the CPI? a. the Department of Commerce b. the Department of Labor c. the General Accounting Office d. the Council of Economic Advisers ANS: B DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Department of Labor MSC: Definitional 1630  Chapter 24/Measuring the Cost of Living 6. The CPI is calculated a. monthly by the Department of Commerce. b. monthly by the Bureau of Labor Statistics. c. quarterly by the Department of Commerce. d. quarterly by the Bureau of Labor Statistics. ANS: B DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Bureau of Labor Statistics MSC: Definitional 7. The CPI is calculated a. weekly. b. monthly. c. quarterly. d. yearly. ANS: B NAT: Analytic TOP: CPI 8. DIF: 1 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Definitional The steps involved in calculating the consumer price index and the inflation rate, in order, are as follows: a. Choose a base year, fix the basket, find the prices, compute the basket’s cost, compute the index, and compute the inflation rate. b. Choose a base year, fix the basket, find the prices, compute the inflation rate, compute the basket's cost, and compute the index. c. Fix the basket, find the prices, compute the basket's cost, choose a base year and compute the index, and compute the inflation rate. d. Fix the basket, find the prices, compute the inflation rate, compute the basket’s cost, and choose a base year and compute the index. ANS: C DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Inflation rate MSC: Definitional 9. In the CPI, goods and services are weighted according to a. how long a market has existed for each good or service. b. the extent to which each good or service is regarded by the government as a necessity. c. how much consumers buy of each good or service. d. the number of firms that produce and sell each good or service. ANS: C NAT: Analytic TOP: CPI 10. In the calculation of the CPI, coffee is given greater weight than tea if a. consumers buy more coffee than tea. b. the price of coffee is higher than the price of tea. c. it costs more to produce coffee than it costs to produce tea. d. coffee is more readily available than tea is to the typical consumer. ANS: A NAT: Analytic TOP: CPI 11. DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Interpretive DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative In the calculation of the CPI, sweaters are given greater weight than jeans if a. the price of sweaters is higher than the price of jeans. b. it costs more to produce sweaters than it costs to produce jeans. c. sweaters are more readily available than jeans are to the typical consumer. d. consumers buy more sweaters than jeans. ANS: D NAT: Analytic TOP: CPI DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative Chapter 24/Measuring the Cost of Living  1631 12. In calculating the CPI, a fixed basket of goods and services is used. The quantities of the goods and services in the fixed basket are determined by a. surveying consumers. b. surveying sellers of the goods and services. c. working backward from the rate of inflation to arrive at imputed values for those quantities. d. arbitrary choices made by federal government employees. ANS: A NAT: Analytic TOP: CPI 13. What basket of goods and services is used to construct the CPI? 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 ANS: B NAT: Analytic TOP: CPI 14. DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Interpretive Consider a small economy in which consumers buy only two goods: pies and tarts. In order to compute the consumer price index for this economy for two or more consecutive years, we assume that a. the percentage change in the price of pies is equal to the percentage change in the price of tarts from year to year. b. the number of pies bought by the typical consumer is equal to the number of tarts bought by the typical consumer in each year. c. neither the number of pies nor the number of tarts bought by the typical consumer changes from year to year. d. neither the price of pies nor the price of tarts changes from year to year. ANS: C NAT: Analytic TOP: CPI 16. DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Interpretive Consider a small economy in which consumers buy only two goods: apples and pears. In order to compute the consumer price index for this economy for two or more consecutive years, we assume that a. the number of apples bought by the typical consumer is equal to the number of pears bought by the typical consumer in each year. b. neither the number of apples nor the number of pears bought by the typical consumer changes from year to year. c. the percentage change in the price of apples is equal to the percentage change in the price of pears from year to year. d. neither the price of apples nor the price of pears changes from year to year. ANS: B NAT: Analytic TOP: CPI 15. DIF: 1 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Definitional DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Interpretive To calculate the CPI, the Bureau of Labor Statistics uses a. the prices of all goods and services produced domestically. b. the prices of all final goods and services. c. the prices of all consumer goods. d. the prices of some consumer goods. ANS: D NAT: Analytic TOP: CPI DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Interpretive 1632  Chapter 24/Measuring the Cost of Living 17. When computing the cost of the basket of goods and services purchased by a typical consumer, which of the following changes from year to year? a. the quantities of the goods and services purchased b. the prices of the goods and services c. the goods and services making up the basket d. All of the above are correct. ANS: B NAT: Analytic TOP: CPI 18. In computing the consumer price index, a base year is chosen. Which of the following statements about the base year is correct? a. The base year is always the first year among the years for which computations are being made. b. It is necessary to designate a base year only in the simplest case of two goods; in more realistic cases, it is not necessary to designate a base year. c. The value of the consumer price index is always 100 in the base year. d. The base year is always the year in which the cost of the basket was highest among the years for which computations are being made. ANS: C NAT: Analytic TOP: CPI 19. DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Interpretive The inflation rate is calculated a. by determining the change in the price index from the preceding period. b. by adding up the price increases of all goods and services. c. by computing a simple average of the price increases for all goods and services. d. by determining the percentage increase in the price index from the preceding period. ANS: D NAT: Analytic MSC: Definitional 21. DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Interpretive For any given year, the CPI is the price of the basket of goods and services in the a. given year divided by the price of the basket in the base year, then multiplied by 100. b. given year divided by the price of the basket in the previous year, then multiplied by 100. c. base year divided by the price of the basket in the given year, then multiplied by 100. d. previous year divided by the price of the basket in the given year, then multiplied by 100. ANS: A NAT: Analytic TOP: CPI 20. DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Interpretive DIF: 1 REF: 24-1 LOC: Unemployment and inflation TOP: Inflation rate The inflation rate is calculated a. by determining the change in the price index from the preceding period. b. by determining the change in the price index from the base year. c. by determining the percentage change in the price index from the preceding period. d. by determining the percentage change in the price index from the base year. ANS: C NAT: Analytic MSC: Definitional DIF: 1 REF: 24-1 LOC: Unemployment and inflation TOP: Inflation rate Chapter 24/Measuring the Cost of Living  1633 22. If 2004 is the base year, then the inflation rate for 2005 equals a. b. c. d. ANS: A NAT: Analytic MSC: Interpretive 23. DIF: 2 REF: 24-1 LOC: Unemployment and inflation TOP: Inflation rate TOP: Inflation rate If 2002 is the base year, then the inflation rate in 2005 equals a. b. c. d. ANS: D NAT: Analytic MSC: Interpretive 24. If the consumer price index was 80 in 2004, 100 in 2005, and 110 in 2006, then the base year must be a. 2004. b. 2005. c. 2006. d. The base year cannot be determined from the given information. ANS: B NAT: Analytic TOP: CPI 25. DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative Suppose a basket of goods and services has been selected to calculate the CPI and 2002 has been chosen as the base year. In 2002, the basket’s cost was $75.00; in 2004, the basket’s cost was $79.50; and in 2006, the basket’s cost was $85.86. The value of the CPI was a. 100 in 2002. b. 106 in 2004. c. 114.48 in 2006. d. All of the above are correct. ANS: D NAT: Analytic TOP: CPI 26. DIF: 2 REF: 24-1 LOC: Unemployment and inflation DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative Suppose a basket of goods and services has been selected to calculate the CPI and 2002 has been selected as the base year. In 2002, the basket’s cost was $50; in 2004, the basket’s cost was $52; and in 2006, the basket’s cost was $54.60. The value of the CPI in 2004 was a. 96.2. b. 102.0. c. 104.0. d. 152.0. ANS: C NAT: Analytic TOP: CPI DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative 1634  Chapter 24/Measuring the Cost of Living 27. Suppose a basket of goods and services has been selected to calculate the CPI and 2002 has been selected as the base year. In 2002, the basket’s cost was $50; in 2004, the basket’s cost was $52; and in 2006, the basket’s cost was $54.60. The value of the CPI in 2006 was a. 91.6. b. 104.6. c. 109.2. d. 154.6. ANS: C NAT: Analytic TOP: CPI 28. Suppose a basket of goods and services has been selected to calculate the CPI and 2004 has been selected as the base year. In 2002, the basket’s cost was $50; in 2004, the basket’s cost was $52; and in 2006, the basket’s cost was $54.60. The value of the CPI in 2006 was a. 91.6. b. 95.2. c. 105.0. d. 109.2. ANS: C NAT: Analytic TOP: CPI 29. TOP: Inflation rate DIF: 2 REF: 24-1 LOC: Unemployment and inflation TOP: Inflation rate The price index was 120 in 2006 and 127.2 in 2007. What was the inflation rate? a. 5.7 percent b. 6.0 percent c. 7.2 percent d. 27.2 percent ANS: B NAT: Analytic MSC: Applicative 32. DIF: 2 REF: 24-1 LOC: Unemployment and inflation The price index was 320 in one year and 360 in the next year. What was the inflation rate? a. 9 percent b. 11.1 percent c. 12.5 percent d. 40 percent ANS: C NAT: Analytic MSC: Applicative 31. DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative If the consumer price index was 100 in the base year and 107 in the following year, then the inflation rate was a. 1.07 percent. b. 7 percent. c. 10.7 percent. d. 107 percent. ANS: B NAT: Analytic MSC: Applicative 30. DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative DIF: 2 REF: 24-1 LOC: Unemployment and inflation TOP: Inflation rate For an imaginary economy, the value of the consumer price index was 140 in 2006 and 149.10 in 2007. The economy’s inflation rate for 2007 was a. 6.1 percent. b. 6.5 percent. c. 9.1 percent. d. 49.1 percent. ANS: B NAT: Analytic MSC: Applicative DIF: 2 REF: 24-1 LOC: Unemployment and inflation TOP: Inflation rate Chapter 24/Measuring the Cost of Living  1635 33. From 2004 to 2005, the CPI for medical care increased from 260.8 to 272.8. What was the inflation rate for medical care? a. 4.4 percent b. 4.6 percent c. 12.0 percent d. 172.8 percent ANS: B NAT: Analytic MSC: Applicative 34. DIF: 2 REF: 24-1 LOC: Unemployment and inflation TOP: Inflation rate DIF: 2 REF: 24-1 LOC: Unemployment and inflation TOP: Inflation rate Suppose the price index was 110 in 2004, 120 in 2005, and 125 in 2006. Which of the following statements is correct? a. The economy experienced inflation between 2004 and 2005 and between 2005 and 2006. b. The inflation rate was positive between 2004 and 2005, and it was negative between 2005 and 2006. c. The inflation rate was higher between 2005 and 2006 than it was between 2004 and 2005. d. All of the above are correct. ANS: A NAT: Analytic MSC: Applicative 37. Inflation rate Between October 2001 and October 2002, the CPI in Canada rose from 116.5 to 119.8 and the CPI in Mexico rose from 93.2 to 102.3. What were the inflation rates for Canada and Mexico over this one-year period? a. 2.8 percent for Canada and 9.1 percent for Mexico b. 2.8 percent for Canada and 9.8 percent for Mexico c. 3.3 percent for Canada and 9.1 percent for Mexico d. 3.3 percent for Canada and 9.8 percent for Mexico ANS: B NAT: Analytic MSC: Applicative 36. TOP: The market basket used to calculate the CPI in Aquilonia is 4 loaves of bread, 6 gallons of milk, 2 shirts, and 2 pairs of pants. In 2005, bread cost $1.00 per loaf, milk cost $1.50 per gallon, shirts cost $6.00 each, and pants cost $10.00 per pair. In 2006, bread cost $1.50 per loaf, milk cost $2.00 per gallon, shirts cost $7.00 each, and pants cost $12.00 per pair. Using 2005 as the base year, what was Aquilonia’s inflation rate in 2006? a. 4 percent b. 11 percent c. 19.6 percent d. 24.4 percent ANS: D NAT: Analytic MSC: Applicative 35. DIF: 2 REF: 24-1 LOC: Unemployment and inflation DIF: 2 REF: 24-1 LOC: Unemployment and inflation TOP: Inflation rate The price index was 150 in the first year, 160 in the second year, and 175 in the third year. The inflation rate was about a. 6.25 percent between the first and second years, and 8.6 percent between the second and third years. b. 6.7 percent between the first and second years, and 9.4 percent between the second and third years. c. 10 percent between the first and second years, and 15 percent between the second and third years. d. 60 percent between the first and second years, and 75 percent between the second and third years. ANS: B NAT: Analytic MSC: Applicative DIF: 2 REF: 24-1 LOC: Unemployment and inflation TOP: Inflation rate 1636  Chapter 24/Measuring the Cost of Living 38. The price index was 110 in the first year, 100 in the second year, and 96 in the third year. The economy experienced a. 9.1 percent deflation between the first and second years, and 4 percent deflation between the second and third years. b. 9.1 percent deflation between the first and second years, and 4.2 percent deflation between the second and third years. c. 10 percent deflation between the first and second years, and 4 percent deflation between the second and third years. d. 10 percent deflation between the first and second years, and 4.2 percent deflation between the second and third years. ANS: A NAT: Analytic MSC: Applicative 39. DIF: 2 REF: 24-1 LOC: Unemployment and inflation TOP: Inflation rate DIF: 2 REF: 24-1 LOC: Unemployment and inflation TOP: Price level | Inflation rate In a particular economy, the price index was 270 in 2005 and 300 in 2006. Which of the following statements is correct? a. The economy experienced a rising price level between 2005 and 2006. b. The economy experienced a higher inflation rate between 2005 and 2006 than it had experienced between 2004 and 2005. c. The inflation rate between 2005 and 2006 was 30 percent. d. All of the above are correct. ANS: A NAT: Analytic MSC: Applicative 42. Inflation rate The price index was 150 in the first year, 160 in the second year, and 165 in the third year. Which of the following statements is correct? a. The price level was higher in the second year than in the first year, and it was higher in the third year than in the second year. b. The inflation rate was positive between the first and second years, and it was positive between the second and third years. c. The inflation rate was lower between the second and third years than it was between the first and second years. d. All of the above are correct. ANS: D NAT: Analytic MSC: Applicative 41. TOP: If the price index was 90 in year 1, 100 in year 2, and 95 in year 3, then the economy experienced a. 10 percent inflation between years 1 and 2 ,and 5 percent inflation between years 2 and 3. b. 10 percent inflation between years 1 and 2, and 5 percent deflation between years 2 and 3. c. 11.1 percent inflation between years 1 and 2, and 5 percent inflation between years 2 and 3. d. 11.1 percent inflation between years 1 and 2, and 5 percent deflation between years 2 and 3. ANS: D NAT: Analytic MSC: Applicative 40. DIF: 2 REF: 24-1 LOC: Unemployment and inflation DIF: 2 REF: 24-1 LOC: Unemployment and inflation TOP: Price level | Inflation rate Which of the following changes in the price index produces the greatest rate of inflation: 80 to 100, 100 to 120, or 150 to 170? a. 80 to 100 b. 100 to 120 c. 150 to 170 d. All of these changes produce the same rate of inflation. ANS: A NAT: Analytic MSC: Applicative DIF: 2 REF: 24-1 LOC: Unemployment and inflation TOP: Inflation rate Chapter 24/Measuring the Cost of Living  1637 43. 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? a. 106 to 112 b. 112 to 118 c. 118 to 124 d. All of these changes produce the same rate of inflation. ANS: A NAT: Analytic MSC: Applicative 44. TOP: Inflation rate Which of the following changes in the price index produces the greatest rate of inflation: 100 to 110, 150 to 165, or 180 to 198? a. 100 to 110 b. 150 to 165 c. 180 to 198 d. All of these changes produce the same rate of inflation. ANS: D NAT: Analytic MSC: Applicative 45. DIF: 2 REF: 24-1 LOC: Unemployment and inflation DIF: 2 REF: 24-1 LOC: Unemployment and inflation TOP: Inflation rate If the CPI was 110 this year and 100 last year, then a. the cost of the CPI basket of goods and services increased by 110 percent this year. b. the price level increased by 10 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. ANS: B DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Price level MSC: Applicative 46. If the CPI was 125 this year and 120 last year, then a. the cost of the CPI basket of goods and services increased by 4.2 percent this year. b. the price level increased by 4.2 percent this year. c. the inflation rate for this year was 4.2 percent. d. All of the above are correct. ANS: D DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Price level | Inflation rate MSC: Applicative 47. In an imaginary economy, consumers buy only hot dogs and hamburgers. The fixed basket consists of 10 hot dogs and 6 hamburgers. A hot dog cost $3 in 2006 and $5.40 in 2007. A hamburger cost $5 in 2006 and $6 in 2007. Which of the following statements is correct? a. When 2006 is chosen as the base year, the consumer price index is 90 in 2007. b. When 2006 is chosen as the base year, the inflation rate is 150 percent in 2007. c. When 2007 is chosen as the base year, the consumer price index is 100 in 2006. d. When 2007 is chosen as the base year, the inflation rate is 50 percent in 2007. ANS: D DIF: 3 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Inflation rate MSC: Analytical 1638  Chapter 24/Measuring the Cost of Living 48. In an imaginary economy, consumers buy only sandwiches and magazines. The fixed basket consists of 20 sandwiches and 30 magazines. In 2006, a sandwich cost $4 and a magazine cost $2. In 2007, a sandwich cost $5. The base year is 2006. If the consumer price index in 2007 was 125, then how much did a magazine cost in 2007? a. $0.83 b. $2.25 c. $2.50 d. $3.00 ANS: C NAT: Analytic TOP: CPI 49. DIF: 3 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Analytical In an imaginary economy, consumers buy only sandwiches and magazines. The fixed basket consists of 20 sandwiches and 30 magazines. In 2006, a sandwich cost $4 and a magazine cost $2. In 2007, a sandwich cost $5. The base year is 2006. If the inflation rate in 2007 was 16 percent, then how much did a magazine cost in 2007? a. $1.87 b. $2.08 c. $2.32 d. $3.00 ANS: B DIF: 3 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Inflation rate MSC: Analytical 50. In an imaginary economy, consumers buy only shirts and pants. The fixed basket consists of 6 shirts and 4 pairs of pants. A shirt cost $20 in 2006 and $25 in 2007. A pair of pants cost $30 in 2006 and $40 in 2007. Using 2006 as the base year, which of the following statements is correct? a. For the typical consumer, the number of dollars spent on shirts is equal to the number of dollars spent on pants in each of the two years. b. The consumer price index is 310 in 2007. c. The rate of inflation is 29.17% in 2007. d. None of the above is correct. ANS: C DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Inflation rate MSC: Applicative 51. The price index was 128.96 in 2006, and the inflation rate was 24 percent between 2005 and 2006. The price index in 2005 was a. 104. b. 104.96. c. 152.96. d. 159.91. ANS: A DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Inflation rate MSC: Applicative 52. The price index was 92 in 2000, and the inflation rate was 13 percent between 1999 and 2000. The price index in 1999 was a. 79. b. 81.4. c. 103.96. d. 105. ANS: B DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Inflation rate MSC: Applicative Chapter 24/Measuring the Cost of Living  1639 53. For an imaginary economy, the value of the consumer price index was 138.75 in 2007, and the inflation rate was 11 percent between 2006 and 2007. The consumer price index in 2006 was a. 125. b. 127.75. c. 149.75. d. 154.01. ANS: A DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Inflation rate MSC: Applicative 54. For an imaginary economy, the value of the consumer price index was 125 in 2009, and the inflation rate was 4.8 percent between 2008 and 2009. The consumer price index in 2008 was a. 119.27. b. 120.2. c. 129.8. d. 131. ANS: A DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Inflation rate MSC: Applicative 55. Suppose the price index was 100 in 2004, 118 in 2005, and the inflation rate was lower between 2005 and 2006 than it was between 2004 and 2005. This means that a. the price index in 2006 was lower than 118. b. the price index in 2006 was lower than 136. c. the price index in 2006 was lower than 139.24. d. the inflation rate between 2005 and 2006 was lower than 1.18 percent. ANS: C DIF: 3 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Inflation rate MSC: Analytical 56. Suppose the price index was 105 in 2007, 115.5 in 2008, and the inflation rate was lower between 2008 and 2009 than it was between 2007 and 2008. This means that a. the price index in 2009 was lower than 115.5. b. the price index in 2009 was lower than 126. c. the price index in 2009 was lower than 127.05. d. the inflation rate between 2008 and 2009 was lower than 1.1 percent. ANS: C DIF: 3 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Inflation rate MSC: Analytical 57. Assume an economy experienced a positive rate of inflation between 2003 and 2004 and again between 2004 and 2005. However, the inflation rate was lower between 2004 and 2005 than it was between 2003 and 2004. Which of the following scenarios is consistent with this assumption? 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. ANS: B DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Inflation rate MSC: Applicative 1640  Chapter 24/Measuring the Cost of Living 58. 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? 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. ANS: C DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Inflation rate MSC: Applicative 59. 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? 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. ANS: A NAT: Analytic TOP: CPI 60. DIF: 3 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Analytical For an imaginary economy, the consumer price index was 115.00 in 2004, 126.50 in 2005, and 136.62 in 2006. Which of the following statements is correct? a. For this economy, the base year must be 2004. b. If the basket of goods that is used to calculate the CPI cost $75.00 in the base year, then that basket of goods cost $115.00 in 2004. c. This economy’s rate of inflation for 2006 is 10.12 percent. d. None of the above is correct. ANS: D DIF: 3 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Inflation rate MSC: Analytical 61. Suppose a basket of goods and services has been selected to calculate the consumer price index. In 2005, the basket of goods cost $108.00; in 2006, it cost $135.00; and in 2007, it cost $168.75. Which of the following statements is correct? a. Using 2005 as the base year, the economy’s inflation rate was higher in 2007 than it was in 2006. b. If 2007 is the base year, then the CPI is 33.75 in 2006. c. If the CPI is 156.25 in 2007, then 2005 is the base year. d. Using 2005 as the base year, the economy’s inflation rate for 2006 was 27 percent. ANS: C DIF: 3 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Inflation rate MSC: Analytical Chapter 24/Measuring the Cost of Living  1641 Table 24-1 The table below pertains to Pieway, an economy in which the typical consumer’s basket consists of 10 bushels of peaches and 15 bushels of pecans. Year 2005 2006 62. Price of Peaches $11 per bushel $9 per bushel DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative Refer to Table 24-1. If 2005 is the base year, then the CPI for 2006 was a. 83.3. b. 100. c. 120. d. 240. ANS: C NAT: Analytic TOP: CPI 66. DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative Refer to Table 24-1. If 2005 is the base year, then the CPI for 2005 was a. 83.3. b. 100. c. 120. d. 200. ANS: B NAT: Analytic TOP: CPI 65. DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative Refer to Table 24-1. The cost of the basket in 2006 was a. $200. b. $210. c. $240. d. $245. ANS: C NAT: Analytic TOP: CPI 64. $6 per bushel $10 per bushel Refer to Table 24-1. The cost of the basket in 2005 was a. $200. b. $210. c. $240. d. $245. ANS: A NAT: Analytic TOP: CPI 63. Price of Pecans DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative Refer to Table 24-1. If 2006 is the base year, then the CPI for 2005 was a. 83.3. b. 100. c. 120. d. 200. ANS: A NAT: Analytic TOP: CPI DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative 1642  Chapter 24/Measuring the Cost of Living 67. Refer to Table 24-1. If 2006 is the base year, then the CPI for 2006 was a. 83.3. b. 100. c. 120. d. 240. ANS: B NAT: Analytic TOP: CPI 68. Refer to Table 24-1. If 2005 is the base year, then the inflation rate in 2006 was a. 16.7 percent. b. 20 percent. c. 40 percent. d. 44.1 percent. ANS: B NAT: Analytic MSC: Applicative 69. DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative DIF: 2 REF: 24-1 LOC: Unemployment and inflation TOP: Inflation rate Refer to Table 24-1. If 2006 is the base year, then the inflation rate in 2006 was a. 16.7 percent. b. 20 percent. c. 40 percent. d. 44.1 percent. ANS: B NAT: Analytic MSC: Applicative DIF: 2 REF: 24-1 LOC: Unemployment and inflation TOP: Inflation rate Table 24-2 The table below pertains to Iowan, an economy in which the typical consumer’s basket consists of 3 pounds of pork and 4 bushels of corn. Year 2008 2009 70. Price of Pork $20 per pound $25 per pound Refer to Table 24-2. The cost of the basket in 2008 was a. $108. b. $147. c. $160. d. $224. ANS: A NAT: Analytic TOP: CPI 71. Price of Corn $12 per bushel $18 per bushel DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative Refer to Table 24-2. The cost of the basket in 2009 was a. $108. b. $147. c. $160. d. $301. ANS: B NAT: Analytic TOP: CPI DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative Chapter 24/Measuring the Cost of Living  1643 72. Refer to Table 24-2. If 2008 is the base year, then the CPI for 2008 was a. 73.5. b. 100. c. 108. d. 136.1. ANS: B NAT: Analytic TOP: CPI 73. Refer to Table 24-2. If 2008 is the base year, then the CPI for 2009 was a. 73.5. b. 100. c. 136.1. d. 147. ANS: C NAT: Analytic TOP: CPI 74. DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative Refer to Table 24-2. If 2008 is the base year, then the inflation rate in 2009 was a. 26.5 percent. b. 36.1 percent. c. 39 percent. d. 47 percent. ANS: B NAT: Analytic MSC: Applicative 77. DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative Refer to Table 24-2. If 2009 is the base year, then the CPI for 2009 was a. 73.5. b. 100. c. 136.1. d. 147. ANS: B NAT: Analytic TOP: CPI 76. DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative Refer to Table 24-2. If 2009 is the base year, then the CPI for 2008 was a. 73.5. b. 100. c. 108. d. 136.1. ANS: A NAT: Analytic TOP: CPI 75. DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative DIF: 2 REF: 24-1 LOC: Unemployment and inflation TOP: Inflation rate Refer to Table 24-2. If 2009 is the base year, then the inflation rate in 2009 was a. 26.5 percent. b. 36.1 percent. c. 39 percent. d. 47 percent. ANS: B NAT: Analytic MSC: Applicative DIF: 2 REF: 24-1 LOC: Unemployment and inflation TOP: Inflation rate 1644  Chapter 24/Measuring the Cost of Living Table 24-3 The table below pertains to Studious, an economy in which the typical consumer’s basket consists of 5 books and 10 calculators. Year 2006 2007 2008 78. Price of a Book $24 $30 $32 Refer to Table 24-3. The cost of the basket in 2006 was a. $32. b. $200. c. $280. d. $480. ANS: B NAT: Analytic TOP: CPI 79. DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative Refer to Table 24-3. If 2006 is the base year, then the consumer price index was 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. ANS: A NAT: Analytic TOP: CPI 82. DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative Refer to Table 24-3. The cost of the basket a. increased by $10 from 2006 to 2007. b. increased by $42 from 2006 to 2007. c. increased by $70 from 2006 to 2007. d. increased by $150 from 2006 to 2007. ANS: C NAT: Analytic TOP: CPI 81. DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative Refer to Table 24-3. The cost of the basket a. increased from 2006 to 2007 and increased from 2007 to 2008. b. increased from 2006 to 2007 and decreased from 2007 to 2008. c. decreased from 2006 to 2007 and increased from 2007 to 2008. d. decreased from 2006 to 2007 and decreased from 2007 to 2008. ANS: A NAT: Analytic TOP: CPI 80. Price of a Calculator $8 $12 $15 DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative Refer to Table 24-3. If 2007 is the base year, then the consumer price index was a. 74.1 in 2006, 100 in 2007, and 114.8 in 2008. b. 74.1 in 2006, 270 in 2007, and 310 in 2008. c. 200 in 2006, 100 in 2007, and 114.8 in 2008. d. 200 in 2006, 270 in 2007, and 310 in 2008. ANS: A NAT: Analytic TOP: CPI DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative Chapter 24/Measuring the Cost of Living  1645 83. Refer to Table 24-3. If 2008 is the base year, then the consumer price index was a. 64.5 in 2006, 87.1 in 2007, and 100 in 2008. b. 64.5 in 2006, 270 in 2007, and 310 in 2008. c. 200 in 2006, 87.1 in 2007, and 100 in 2008. d. 200 in 2006, 270 in 2007, and 310 in 2008. ANS: A NAT: Analytic TOP: CPI 84. DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative Refer to Table 24-3. The inflation rate was a. 22.6 percent in 2007 and 12.9 percent in 2008. b. 25.9 percent in 2007 and 14.8 percent in 2008. c. 35 percent in 2007 and 14.8 percent in 2008. d. 35 percent in 2007 and 20 percent in 2008. ANS: C NAT: Analytic MSC: Applicative DIF: 2 REF: 24-1 LOC: Unemployment and inflation TOP: Inflation rate Table 24-4 The table below pertains to Wrexington, an economy in which the typical consumer’s basket consists of 20 pounds of meat and 10 toys. Year 2004 2005 2006 85. Price of Meat $3 per pound $1 per pound $4 per pound Refer to Table 24-4. The cost of the basket in 2006 was a. $9. b. $130. c. $140. d. $270. ANS: B NAT: Analytic TOP: CPI 86. DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative Refer to Table 24-4. The cost of the basket a. increased from 2004 to 2005 and increased from 2005 to 2006. b. increased from 2004 to 2005 and decreased from 2005 to 2006. c. decreased from 2004 to 2005 and increased from 2005 to 2006. d. decreased from 2004 to 2005 and decreased from 2005 to 2006. ANS: A NAT: Analytic TOP: CPI 87. Price of a Toy $2 $7 $5 DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative Refer to Table 24-4. The cost of the basket 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. ANS: D NAT: Analytic TOP: CPI DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative 1646  Chapter 24/Measuring the Cost of Living 88. Refer to Table 24-4. If the base year is 2004, then the CPI in 2004 was a. 0. b. 1. c. 80. d. 100. ANS: D NAT: Analytic TOP: CPI 89. Refer to Table 24-4. If the base year is 2004, then the CPI in 2005 was a. 88.9. b. 90. c. 100. d. 112.5. ANS: D NAT: Analytic TOP: CPI 90. DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative Refer to Table 24-4. If the base year is 2004, then the inflation rate in 2006 was a. 44.4%. b. 50%. c. 62.5%. d. 80%. ANS: A NAT: Analytic MSC: Applicative 93. DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative Refer to Table 24-4. If the base year is 2006, then the CPI a. increased from 2004 to 2005 and increased from 2005 to 2006. b. increased from 2004 to 2005 and decreased from 2005 to 2006. c. decreased from 2004 to 2005 and increased from 2005 to 2006. d. decreased from 2004 to 2005 and decreased from 2005 to 2006. ANS: A NAT: Analytic TOP: CPI 92. DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative Refer to Table 24-4. If the base year is 2004, then the CPI a. increased from 2004 to 2005 and increased from 2005 to 2006. b. increased from 2004 to 2005 and decreased from 2005 to 2006. c. decreased from 2004 to 2005 and increased from 2005 to 2006. d. decreased from 2004 to 2005 and decreased from 2005 to 2006. ANS: A NAT: Analytic TOP: CPI 91. DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative DIF: 2 REF: 24-1 LOC: Unemployment and inflation TOP: Inflation rate Refer to Table 24-4. If the base year is 2006, then the inflation rate in 2005 was a. -44.5%. b. -30.8%. c. 7.7%. d. 12.5%. ANS: D NAT: Analytic MSC: Applicative DIF: 2 REF: 24-1 LOC: Unemployment and inflation TOP: Inflation rate Chapter 24/Measuring the Cost of Living  1647 94. Refer to Table 24-4. The inflation rate was a. negative in 2005 and negative in 2006. b. negative in 2005 and positive in 2006. c. positive in 2005 and negative in 2006. d. positive in 2005 and positive in 2006. ANS: D NAT: Analytic MSC: Applicative DIF: 2 REF: 24-1 LOC: Unemployment and inflation TOP: Inflation rate Table 24-5 The table below pertains to Yackandsnack, an economy in which the typical consumer’s basket consists of 2 cell phones and 20 ham sandwiches. Year 2006 2007 2008 95. Price of a Cell Phone $50 $60 $55 Refer to Table 24-5. The cost of the basket a. increased from 2006 to 2007 and increased from 2007 to 2008. b. increased from 2006 to 2007 and decreased from 2007 to 2008. c. decreased from 2006 to 2007 and increased from 2007 to 2008. d. decreased from 2006 to 2007 and decreased from 2007 to 2008. ANS: A NAT: Analytic TOP: CPI 96. DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative Refer to Table 24-5. If the base year is 2007, then the consumer price index was a. 80 in 2006, 100 in 2007, and 105 in 2008. b. 80 in 2006, 200 in 2007, and 210 in 2008. c. 160 in 2006, 100 in 2007, and 105 in 2008. d. 160 in 2006, 200 in 2007, and 210 in 2008. ANS: A NAT: Analytic TOP: CPI 98. DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative Refer to Table 24-5. If the base year is 2006, then the consumer price index was a. 100 in 2006, 125 in 2007, and 131.25 in 2008. b. 100 in 2006, 200 in 2007, and 210 in 2008. c. 160 in 2006, 125 in 2007, and 131.25 in 2008. d. 160 in 2006, 200 in 2007, and 210 in 2008. ANS: A NAT: Analytic TOP: CPI 97. Price of a Ham Sandwich $3 $4 $5 DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative Refer to Table 24-5. If the base year is 2008, then the CPI a. increased from 2004 to 2005 and increased from 2005 to 2006. b. increased from 2004 to 2005 and decreased from 2005 to 2006. c. decreased from 2004 to 2005 and increased from 2005 to 2006. d. decreased from 2004 to 2005 and decreased from 2005 to 2006. ANS: A NAT: Analytic TOP: CPI DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Applicative 1648  Chapter 24/Measuring the Cost of Living 99. Refer to Table 24-5. If the base year is 2006, then the economy’s inflation rate in 2007 is a. 20 percent. b. 25 percent. c. 40 percent. d. 125 percent. ANS: B NAT: Analytic MSC: Applicative DIF: 2 REF: 24-1 LOC: Unemployment and inflation TOP: Inflation rate 100. Refer to Table 24-5. If the base year is 2007, then the economy’s inflation rate in 2008 was a. 1.05 percent. b. 4.8 percent. c. 5 percent. d. 10 percent. ANS: C NAT: Analytic MSC: Applicative DIF: 2 REF: 24-1 LOC: Unemployment and inflation TOP: Inflation rate 101. Which of the following is not an example of a price index computed by the Bureau of Labor Statistics? a. the Los Angeles price index b. the energy price index c. the producer price index d. the stock price index ANS: D DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Bureau of Labor Statistics MSC: Interpretive 102. The producer price index measures the cost of a basket of goods and services a. typically produced in the economy. b. produced for a typical consumer. c. sold by producers. d. bought by firms. ANS: D NAT: Analytic TOP: PPI DIF: 1 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Definitional 103. The price index that measures the cost of a basket of goods and services bought by firms is called the a. industrial price index. b. producer price index. c. core price index. d. GDP deflator. ANS: B NAT: Analytic TOP: PPI DIF: 1 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Definitional 104. Changes in the producer price index are often thought to be useful in predicting changes in a. stock prices. b. the consumer price index. c. the unemployment rate. d. the rate of output of goods and services. ANS: B NAT: Analytic TOP: PPI | CPI DIF: 1 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Definitional Chapter 24/Measuring the Cost of Living  1649 105. Suppose that in 2010, the producer price index increases by 2 percent. As a result, economists most likely will predict that a. GDP will increase in 2011. b. the producer price index will increase by more than 2 percent in 2011. c. interest rates will decrease in the future. d. the consumer price index will increase in the future. ANS: D NAT: Analytic TOP: PPI | CPI DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Interpretive 106. When constructing the consumer price index, the Bureau of Labor Statistics does not do which of the following? a. Try to include all the goods and services that the typical consumer buys. b. Try to weight the goods and services that the typical consumer buys according to how much consumers buy of each item. c. Survey consumers to determine what the typical consumer buys. d. Survey sellers to determine what the typical consumer buys. ANS: D DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Bureau of Labor Statistics MSC: Interpretive 107. By far the largest category of goods and services in the CPI basket is a. housing. b. transportation. c. education & communication. d. food & beverages. ANS: A DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Categories of consumer spending MSC: Definitional 108. For purposes of calculating the CPI, the housing category of consumer spending includes the cost of a. shelter. b. fuel and other utilities. c. household furnishings and operation. d. All of the above are correct. ANS: D DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Categories of consumer spending MSC: Definitional 109. For purposes of calculating the CPI, the transportation category of consumer spending includes the cost of a. subways. b. gasoline. c. both subways and gasoline. d. neither subways nor gasoline. ANS: C DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Categories of consumer spending MSC: Definitional 110. For purposes of calculating the CPI, the food & beverages category of consumer spending includes the cost of a. food away from home. b. alcoholic beverages. c. both food away from home and alcoholic beverages. d. neither food away from home nor alcoholic beverages because these are included in the recreation category of consumer spending. ANS: C DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Categories of consumer spending MSC: Definitional 1650  Chapter 24/Measuring the Cost of Living 111. For purposes of calculating the CPI, the apparel category of consumer spending includes the cost of a. clothing, but not footwear or jewelry. b. clothing and footwear, but not jewelry. c. clothing and jewelry, but not footwear. d. clothing, footwear, and jewelry. ANS: D DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Categories of consumer spending MSC: Definitional 112. In the basket of goods that is used to compute the consumer price index, the three largest categories of consumer spending are a. housing, transportation, and recreation. b. housing, transportation, and food & beverages. c. housing, food & beverages, and education & communication. d. housing, medical care, and education & communication. ANS: B DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Categories of consumer spending MSC: Interpretive 113. In the basket of goods that is used to compute the consumer price index, which of the following categories of consumer spending is the smallest? a. food & beverages b. recreation c. housing d. apparel ANS: D DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Categories of consumer spending MSC: Interpretive 114. In the basket of goods that is used to compute the consumer price index, which of the following categories of consumer spending is the smallest? a. education & communication b. apparel c. medical care d. recreation ANS: B DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Categories of consumer spending MSC: Interpretive 115. In the basket of goods that is used to compute the consumer price index, which of the following categories of consumer spending is the largest? a. education & communication b. food & beverages c. medical care d. recreation ANS: B DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Categories of consumer spending MSC: Interpretive 116. In the basket of goods that is used to compute the consumer price index, which of the following categories of consumer spending is the largest? a. education & communication b. recreation c. medical care d. All of the above categories are about equal in magnitude. ANS: D DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Categories of consumer spending MSC: Interpretive Chapter 24/Measuring the Cost of Living  1651 117. Categories of U.S. consumer spending, ranked from largest to smallest, are a. housing, food & beverages, education & communication, and transportation. b. education & communication, housing, food & beverages, and transportation. c. food & beverages, housing, transportation, and medical care. d. housing, transportation, food & beverages, and medical care. ANS: D DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Categories of consumer spending MSC: Interpretive 118. If the cost of housing increases by 10 percent, then, other things the same, the CPI is likely to increase by about a. 1.7 percent. b. 3.3 percent. c. 4.3 percent. d. 10 percent. ANS: C DIF: 3 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Categories of consumer spending MSC: Analytical 119. If the cost of transportation increases by 10 percent, then, other things the same, the CPI is likely to increase by about a. 0.6 percent. b. 1.7 percent. c. 3.3 percent. d. 10 percent. ANS: B DIF: 3 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Categories of consumer spending MSC: Analytical 120. If the cost of food & beverages increases by 20 percent, then, other things the same, the CPI is likely to increase by about a. 3 percent. b. 15 percent. c. 20 percent. d. 30 percent. ANS: A DIF: 3 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Categories of consumer spending MSC: Analytical 121. If the cost of medical care increases by 50 percent, then, other things the same, the CPI is likely to increase by about a. 3 percent. b. 6 percent. c. 12 percent. d. 50 percent. ANS: A DIF: 3 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Categories of consumer spending MSC: Analytical 122. If the cost of apparel increases by 50 percent, then, other things the same, the CPI is likely to increase by about a. 1 percent. b. 2 percent. c. 4 percent. d. 8 percent. ANS: B DIF: 3 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Categories of consumer spending MSC: Analytical 1652  Chapter 24/Measuring the Cost of Living 123. The goal of the consumer price index is to measure changes in the a. costs of production. b. cost of living. c. relative prices of consumer goods. d. production of consumer goods. ANS: B NAT: Analytic TOP: CPI DIF: 1 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Definitional 124. The consumer price index tries to gauge how much incomes must rise to maintain a. an increasing standard of living. b. a constant standard of living. c. a decreasing standard of living. d. the highest standard of living possible. ANS: B DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Standard of living MSC: Definitional 125. The consumer price index is a. not very useful as a measure of the cost of living. b. a perfect measure of the cost of living. c. a useful measure, but not a perfect measure, of the cost of living. d. not used as a measure of the cost of living. ANS: C NAT: Analytic TOP: CPI DIF: 1 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Definitional 126. Which of the following is not a widely acknowledged problem with using the CPI as a measure of the cost of living? a. substitution bias b. introduction of new goods c. unmeasured quality change d. unmeasured price change ANS: D NAT: Analytic TOP: CPI DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Interpretive 127. The three problems with using the consumer price index as a measure of the cost of living are a. widely acknowledged and easy to solve. b. widely acknowledged and difficult to solve. c. nearly unacknowledged and easy to solve. d. nearly unacknowledged and difficult to solve. ANS: B NAT: Analytic TOP: CPI DIF: 1 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Definitional 128. When the relative price of a good increases, consumers respond by buying a. a larger quantity of that good and a larger quantity of substitutes for that good. b. a larger quantity of that good and a smaller quantity of substitutes for that good. c. a smaller quantity of that good and a larger quantity of substitutes for that good. d. a smaller quantity of that good and a smaller quantity of substitutes for that good. ANS: C NAT: Analytic TOP: Substitutes DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Interpretive Chapter 24/Measuring the Cost of Living  1653 129. When the relative price of a good decreases, consumers respond by buying a. a larger quantity of that good and a larger quantity of substitutes for that good. b. a larger quantity of that good and a smaller quantity of substitutes for that good. c. a smaller quantity of that good and a larger quantity of substitutes for that good. d. a smaller quantity of that good and a smaller quantity of substitutes for that good. ANS: B NAT: Analytic TOP: Substitutes DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Interpretive 130. Suppose the price of a quart of milk rises from $1 to $1.25 and the price of a T-shirt rises from $8 to $10. If the CPI rises from 150 to 175, then people likely will buy 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. ANS: D NAT: Analytic TOP: CPI | Prices DIF: 3 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Analytical 131. Suppose the price of a gallon of ice cream rises from $4 to $5 and the price of a can of coffee rises from $2 to $2.50. If the CPI rises from 150 to 200, then people likely will buy a. more ice cream and more coffee. b. more ice cream and less coffee. c. less ice cream and more coffee. d. less ice cream and less coffee. ANS: A NAT: Analytic TOP: CPI | Prices DIF: 3 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Analytical 132. Suppose the price of a tub of margarine rises from $3 to $3.75 and the price of a notebook rises from $1.25 to $1.75. If the CPI rises from 140 to 182, then people likely will buy a. more margarine and more notebooks. b. more margarine and fewer notebooks. c. less margarine and more notebooks. d. less margarine and fewer notebooks. ANS: B NAT: Analytic TOP: CPI | Prices DIF: 3 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Analytical 133. One problem with the consumer price index stems from the fact that, over time, consumers tend to buy larger quantities of goods that have become relatively less expensive and smaller quantities of goods that have become relatively more expensive. This problem is called a. price-change neglect. b. unmeasured quality change. c. substitution bias. d. relative bias. ANS: C DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Substitution bias MSC: Definitional 1654  Chapter 24/Measuring the Cost of Living 134. The substitution bias in the consumer price index refers to the a. substitution by consumers toward new goods and away from old goods. b. substitution by consumers toward a smaller number of high-quality goods and away from a larger number of low-quality goods. c. substitution by consumers toward goods that have become relatively less expensive and away from goods that have become relatively more expensive. d. substitution of new prices for old prices in the CPI basket of goods and services from one year to the next. ANS: C DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Substitution bias MSC: Interpretive 135. Suppose that the prices of dairy products have risen relatively less than prices in general over the last several years. To which problem in the construction of the CPI is this situation most relevant? a. substitution bias b. introduction of new goods c. unmeasured quality change d. income bias ANS: A DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Substitution bias MSC: Applicative 136. 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? a. substitution bias b. introduction of new goods c. unmeasured quality change d. income effect ANS: A DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Substitution bias MSC: Applicative 137. Assume that consumers consider coffee and tea to be substitutes, so that when the price of tea rises, consumers purchase less tea and more coffee. When the CPI is computed following the increase in the price of tea, it takes into account a. the increase in the price of tea. b. the decrease in the quantity of tea purchased and the increase in the quantity of coffee purchased. c. both (a) and (b). d. None of the above is correct. ANS: A DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Substitution bias MSC: Applicative 138. By not taking into account the possibility of consumer substitution, the CPI 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. ANS: B DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Substitution bias MSC: Interpretive Chapter 24/Measuring the Cost of Living  1655 139. Suppose the price of gasoline increases rapidly and consumers respond by buying a smaller quantity of gasoline. The consumer price index a. reflects this price increase accurately. b. understates this price increase due to the substitution bias. c. overstates this price increase due to the income bias. d. overstates this price increase due to the substitution bias. ANS: D DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Substitution bias MSC: Interpretive 140. When new goods are introduced, consumers have more variety from which to choose. As a result, each dollar is worth 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. ANS: B DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Introduction of new goods MSC: Interpretive 141. The introduction of a new good a. increases the cost of maintaining the same level of economic well-being. b. decreases the cost of maintaining the same level of economic well-being. c. has no impact on the cost of maintaining the same level of economic well-being. d. may increase or decrease the cost of maintaining the same level of economic well-being, depending on how expensive the new good is. ANS: B DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Introduction of new goods MSC: Interpretive 142. One of the widely acknowledged problems with using the consumer price index as a measure of the cost of living is that the CPI a. fails to account for consumer spending on housing. b. accounts only for consumer spending on food, clothing, and energy. c. fails to account for the fact that consumers spend larger percentages of their incomes on some goods and smaller percentages of their incomes on other goods. d. fails to account for the introduction of new goods. ANS: D DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Introduction of new goods MSC: Interpretive 143. 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 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. ANS: D DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Introduction of new goods MSC: Interpretive 1656  Chapter 24/Measuring the Cost of Living 144. To which of the problems in the construction of the CPI is the invention of pocket-sized computers most relevant? a. substitution bias b. introduction of new goods c. unmeasured quality change d. income bias ANS: B DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Introduction of new goods MSC: Applicative 145. To which of the problems in the construction of the CPI is the creation of the mobile phone most relevant? a. substitution bias b. introduction of new goods c. unmeasured quality change d. income bias ANS: B DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Introduction of new goods MSC: Applicative 146. If the quality of a good improves while its price remains the same, then the value of a dollar 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. ANS: B DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Quality change MSC: Interpretive 147. If the quality of a good deteriorates while its price remains the same, then the value of a dollar 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. ANS: C DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Quality change MSC: Interpretive 148. When the quality of a good improves while its price remains the same, the purchasing power of the dollar a. increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for. b. increases, so the CPI understates the change in the cost of living if the quality change is not accounted for. c. decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted for. d. decreases, so the CPI understates the change in the cost of living if the quality change is not accounted for. ANS: A DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Quality change MSC: Interpretive Chapter 24/Measuring the Cost of Living  1657 149. When the quality of a good deteriorates while its price remains the same, the purchasing power of the dollar a. increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for. b. increases, so the CPI understates the change in the cost of living if the quality change is not accounted for. c. decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted for. d. decreases, so the CPI understates the change in the cost of living if the quality change is not accounted for. ANS: D DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Quality change MSC: Interpretive 150. One of the widely acknowledged problems with using the consumer price index as a measure of the cost of living is that the CPI a. fails to measure all changes in the quality of goods. b. displays a housing bias. c. accounts for changes in prices of some goods, but prices of certain goods are assumed to remain constant. d. All of the above are correct. ANS: A DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Quality change MSC: Interpretive 151. Suppose lawn mowers are part of the market basket used to compute the CPI. Suppose also that the quality of lawn mowers improves while the price of lawn mowers stays the same. If the Bureau of Labor Statistics is able to precisely adjust the CPI for the improvement in quality, then, other things equal, a. the CPI will rise. b. the CPI will fall. c. the CPI will stay the same. d. lawn mowers will no longer be included in the market basket. ANS: B DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Quality change MSC: Applicative 152. For some racquet sports, there have been increases in the size of the racquets; also, the methods and materials used for making racquets have improved. To which problem in the construction of the CPI is this situation most relevant? a. substitution bias b. introduction of new goods c. unmeasured quality change d. income bias ANS: C DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Quality change MSC: Applicative 153. Laura bought word-processing software in 2005 for $50. Laura's twin brother, Laurence, bought an upgrade of the same software in 2006 for $50. To which problem in the construction of the CPI is this situation most relevant? a. substitution bias b. unmeasured quality change c. introduction of new goods d. income bias ANS: B DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Quality change MSC: Applicative 1658  Chapter 24/Measuring the Cost of Living 154. Which of the following is the most accurate statement about the effects of quality change on the CPI? a. Even though the BLS adjusts the prices of products in the CPI basket when the quality of the products change, changes in quality are still a problem because quality is so hard to measure. b. Because the BLS adjusts the prices of products in the CPI basket when the quality of the products change, changes in quality are no longer a problem for the CPI. c. The BLS does not adjust the CPI for quality changes. d. Most economists believe that changes in the quality of goods included in the CPI basket do not bias the CPI as a measure of the cost of living. ANS: A DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Quality change MSC: Interpretive 155. Suppose OPEC succeeds in raising world oil prices by 300 percent. This price increase causes inventors to look at alternative sources of fuel for internal-combustion engines. A hydrogen-powered engine is developed which is cheaper to operate than gasoline engines. Which problems in the construction of the CPI does this situation represent? a. substitution bias and introduction of new goods b. introduction of new goods and unmeasured quality change c. substitution bias and unmeasured quality change d. income bias and substitution bias ANS: A DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Substitution bias | Introduction of new goods MSC: Applicative 156. Which of these events would cause the consumer price index to overstate the increase in the cost of living? a. Car makers benefit from a new technology that allows them to sell higher-quality cars to consumers with no increase in price. b. Energy prices decrease, and consumers respond by buying more gas and electricity. c. A new good is introduced that renders cellular telephones inferior and obsolete. d. All of the above are correct. ANS: NAT: TOP: MSC: D DIF: 2 REF: 24-1 Analytic LOC: The study of economics and definitions of economics CPI | Substitution bias | Introduction of new goods | Quality change Applicative 157. Which of the following statements best represents economists' beliefs about the bias in the CPI as a measure of the cost of living? a. Economists agree that the bias in the CPI is a very serious problem. b. Economists agree that the bias in the CPI is not a serious problem. c. Economists agree on the severity of the CPI bias, but there is still debate on what to do about it. d. There is still debate among economists on the severity of the CPI bias and what to do about it. ANS: D DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | Economists MSC: Definitional 158. Several studies in the 1990s concluded that the consumer price index overstated inflation by about a. 3 percentage points per year, and that number of percentage points likely still applies now. b. 3 percentage points per year, but recent improvements to the CPI probably have reduced the overstatement of inflation to something less than 3 percentage points. c. 1 percentage point per year, and that number of percentage points likely still applies now. d. 1 percentage point per year, but recent improvements to the CPI probably have reduced the overstatement of inflation to something less than 1 percentage point ANS: D NAT: Analytic TOP: CPI DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Interpretive Chapter 24/Measuring the Cost of Living  1659 159. Recent changes in methods used to compute the CPI have made the a. upward bias in the CPI inflation rate more severe than it used to be. b. upward bias in the CPI inflation rate less severe than it used to be. c. downward bias in the CPI inflation rate more severe than it used to be. d. downward bias in the CPI inflation rate less severe than it used to be. ANS: B NAT: Analytic TOP: CPI DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Interpretive 160. The problems with using the consumer price index as a measure of the cost of living are important because a. even the appearance of high rates of inflation cause voters to become disenchanted. b. politicians have manipulated the measurement problems to their advantage. c. many government programs use the CPI to adjust for changes in the overall level of prices. d. if the price level is overstated, consumers will be taken advantage of by sellers of consumer goods. ANS: C NAT: Analytic TOP: CPI DIF: 2 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Interpretive 161. The GDP deflator reflects the a. level of prices in the base year relative to the current level of prices. b. current level of prices relative to the level of prices in the base year. c. level of real output in the base year relative to the current level of real output. d. current level of real output relative to the level of real output in the base year. ANS: B NAT: Analytic TOP: GDP deflator DIF: 1 REF: 24-1 LOC: The study of economics and definitions of economics MSC: Definitional 162. Two alternative measures of the overall level of prices are 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. ANS: C DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Interpretive 163. The CPI and the GDP deflator a. generally move together. b. generally show different patterns of movement. c. always show identical changes. d. always show different patterns of movement. ANS: A DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Interpretive 164. An important difference between the GDP deflator and the consumer price index is that a. the GDP deflator reflects the prices of goods and services bought by producers, whereas the consumer price index reflects the prices of goods and services bought by consumers. b. the GDP deflator reflects the prices of all final goods and services produced domestically, whereas the consumer price index reflects the prices of goods and services bought by consumers. c. the GDP deflator reflects the prices of all final goods and services produced by a nation's citizens, whereas the consumer price index reflects the prices of all final goods and services bought by consumers. d. the GDP deflator reflects the prices of all final goods and services bought by producers and consumers, whereas the consumer price index reflects the prices of all final goods and services bought by consumers. ANS: B DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Definitional 1660  Chapter 24/Measuring the Cost of Living 165. The GDP Deflator reflects a. the prices of all final goods and services currently produced domestically, as does the CPI. b. the price of a fixed basket of goods and services purchased by a typical consumer, as does the CPI. c. the prices of all final goods and services currently produced domestically, while the CPI reflects the price of a fixed basket of goods and services purchased by a typical consumer. d. the price of a fixed basket of goods and services purchased by a typical consumer, while the CPI reflects the prices of all final goods and services produced domestically. ANS: C DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Definitional 166. The CPI differs from the GDP deflator in that a. the CPI is a price index, while the GDP deflator is an inflation index. b. substitution bias is not a problem with the CPI, but it is a problem with the GDP deflator. c. increases in the prices of foreign produced goods that are sold to U.S. consumers show up in the CPI but not in the GDP deflator. d. increases in the prices of domestically produced goods that are sold to the U.S. government show up in the CPI but not in the GDP deflator. ANS: C DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Interpretive 167. The CPI differs from the GDP deflator in that a. the CPI is an inflation index, while the GDP deflator is a price index. b. substitution bias is not a problem with the CPI, but it is a problem with the GDP deflator. c. increases in the prices of foreign produced goods that are sold to U.S. consumers show up in the GDP deflator but not in the CPI. d. increases in the prices of domestically produced goods that are sold to the U.S. government show up in the GDP deflator but not in the CPI. ANS: D DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Interpretive 168. An increase in the price of dairy products produced domestically will be reflected in a. both the GDP deflator and the consumer price index. b. neither the GDP deflator nor the consumer price index. c. the GDP deflator but not in the consumer price index. d. the consumer price index but not in the GDP deflator. ANS: A DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Applicative 169. An increase in the price of bread produced domestically will be reflected in a. both the GDP deflator and the consumer price index. b. neither the GDP deflator nor the consumer price index. c. the GDP deflator but not in the consumer price index. d. the consumer price index but not in the GDP deflator. ANS: A DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Applicative 170. If the price of domestically produced power tools increases, then a. the consumer price index and the GDP deflator will both increase. b. the consumer price index will increase, and the GDP deflator will be unaffected. c. the consumer price index will be unaffected, and the GDP deflator will increase. d. the consumer price index and the GDP deflator will both be unaffected. ANS: A DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Applicative Chapter 24/Measuring the Cost of Living  1661 171. A Japanese automobile company produces cars in the United States, with some of those cars being exported to other nations and some of them being sold within the United States. If the prices of these cars increase, then a. the GDP deflator and the CPI will both increase. b. the GDP deflator will increase and the CPI will be unchanged. c. the GDP deflator will be unchanged and the CPI will increase. d. the GDP deflator and the CPI will both be unchanged. ANS: A DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Applicative 172. A decrease in the price of domestically produced industrial robots will be reflected in a. both the GDP deflator and the consumer price index. b. neither the GDP deflator nor the consumer price index. c. the GDP deflator but not in the consumer price index. d. the consumer price index but not in the GDP deflator. ANS: C DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Applicative 173. A decrease in the price of domestically produced nuclear reactors will be reflected in a. both the GDP deflator and the consumer price index. b. neither the GDP deflator nor the consumer price index. c. the GDP deflator but not in the consumer price index. d. the consumer price index but not in the GDP deflator. ANS: C DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Applicative 174. In the United States, if the price of imported oil rises so that the prices of gasoline and heating oil rise, then the a. GDP deflator rises much more than does the consumer price index. b. consumer price index rises much more than does the GDP deflator. c. GDP deflator and the consumer price index rise by about the same amount. d. consumer price index rises slightly more than does the GDP deflator. ANS: B DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Definitional 175. In general, if a consumer good is produced domestically and consumed domestically, a decrease in its price will have which of the following effects? a. The consumer price index will decrease relatively more than will the GDP deflator. b. The consumer price index and the GDP deflator will decrease by the same amount. c. The consumer price index will decrease relatively less than will the GDP deflator. d. One cannot generalize about the decrease in the consumer price index relative to the decrease in the GDP deflator. ANS: A DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Interpretive 176. In general, if a consumer good is produced domestically and consumed domestically, an increase in its price will have which of the following effects? a. The consumer price index will increase relatively more than will the GDP deflator. b. The consumer price index and the GDP deflator will increase by the same amount. c. The consumer price index will increase relatively less than will the GDP deflator. d. One cannot generalize about the increase in the consumer price index relative to the increase in the GDP deflator. ANS: A DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Interpretive 1662  Chapter 24/Measuring the Cost of Living 177. The price of DVD players increases dramatically, causing a 1 percent increase in the CPI. The price increase will most likely cause the GDP deflator to increase by a. more than 1 percent. b. less than 1 percent. c. 1 percent. d. None of the above is correct; this particular price increase will not affect the GDP deflator. ANS: B DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Applicative 178. 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? a. The two measures are constructed differently, but they always indicate the same inflation rate. b. The substitution bias applies equally to both measures. c. A change in the price of Korean televisions is reflected in the U.S. consumer price index but not in the U.S. GDP deflator. d. All of the above are correct. ANS: C DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Interpretive 179. If the price of Italian shoes imported into the United States increases, then a. both the GDP deflator and the consumer price index will increase. b. neither the GDP deflator nor the consumer price index will increase. c. the GDP deflator will increase, but the consumer price index will not increase. d. the consumer price index will increase, but the GDP deflator will not increase. ANS: D DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Applicative 180. If the price of Spanish olives imported into the United States decreases, then a. both the GDP deflator and the consumer price index will decrease. b. neither the GDP deflator nor the consumer price index will decrease. c. the GDP deflator will decrease, but the consumer price index will not decrease. d. the consumer price index will decrease, but the GDP deflator will not decrease. ANS: D DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Applicative 181. A decrease in the price of large tractors imported into the United States from Russia a. leaves the GDP deflator unchanged but decreases the consumer price index. b. decreases the GDP deflator but leaves the consumer price index unchanged. c. decreases both the GDP deflator and the consumer price index. d. leaves both the GDP deflator and the consumer price index unchanged. ANS: D DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Applicative 182. Suppose that U.S. mining companies purchase German-made ore trucks at a reduced price. By itself, what effect will this purchase have on the GDP deflator and on the consumer price index? a. The consumer price index and the GDP deflator will both fall. b. The consumer price index and the GDP deflator will both be unaffected. c. The consumer price index will fall, and the GDP deflator will be unaffected. d. The consumer price index will be unaffected, and the GDP deflator will fall. ANS: B DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Applicative Chapter 24/Measuring the Cost of Living  1663 183. Most, but not all, athletic apparel sold in the United States is imported from other nations. If the price of athletic apparel increases, the GDP deflator will a. increase less than will the consumer price index. b. increase more than will the consumer price index. c. not increase, but the consumer price index will increase. d. increase, but the consumer price index will not increase. ANS: A DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Applicative 184. An increase in the price of Irish whiskey regularly purchased by Americans will be reflected in a. both the U.S. GDP deflator and the U.S. CPI. b. neither the U.S. GDP deflator nor the U.S. CPI. c. the U.S. GDP deflator, but not the U.S. CPI. d. the U.S. CPI, but not the U.S. GDP deflator. ANS: D DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Applicative 185. Which is the most accurate statement about the GDP deflator and the consumer price index? a. The GDP deflator compares the price of a fixed basket of goods and services to the price of the basket in the base year, whereas the consumer price index compares the price of currently produced goods and services to the price of the same goods and services in the base year. b. The consumer price index compares the price of a fixed basket of goods and services to the price of the basket in the base year, whereas the GDP deflator compares the price of currently produced goods and services to the price of the same goods and services in the base year. c. Both the GDP deflator and the consumer price index compare the price of a fixed basket of goods and services to the price of the basket in the base year. d. Both the GDP deflator and the consumer price index compare the price of currently produced goods and services to the price of the same goods and services in the base year. ANS: B DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Definitional 186. 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? 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. ANS: D DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Interpretive 187. The basket of goods in the consumer price index changes a. occasionally, as does the group of goods used to compute the GDP deflator. b. automatically, as does the group of goods used to compute the GDP deflator. c. occasionally, whereas the group of goods used to compute the GDP deflator changes automatically. d. automatically, whereas the group of goods used to compute the GDP deflator changes occasionally. ANS: C DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator MSC: Interpretive 1664  Chapter 24/Measuring the Cost of Living 188. In 1979 and 1980, a. the U.S. inflation rate as measured by the GDP deflator was higher than that measured by the CPI, and the difference was explained by rapidly rising prices of goods exported by the U.S. b. the U.S. inflation rate as measured by the CPI was higher than that measured by the GDP deflator, and the difference was explained by rapidly rising prices of goods exported by the U.S. c. the U.S. inflation rate as measured by the GDP deflator was higher than that measured by the CPI, and the difference was explained by rapidly rising oil prices. d. the U.S. inflation rate as measured by the CPI was higher than that measured by the GDP deflator, and the difference was explained by rapidly rising oil prices. ANS: D DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator | Inflation rate MSC: Definitional 189. Which of the following is the most accurate statement? 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. ANS: B DIF: 1 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions of economics TOP: CPI | GDP deflator | Inflation rate MSC: Definitional Sec02 - Measuring the Cost of Living - Correcting Economic Variables for the Effects of Inflation MULTIPLE CHOICE 1. The primary purpose of measuring the overall level of prices in the economy is to a. allow for the measurement of GDP. b. allow consumers to know what kinds of prices to expect in the future. c. allow for the comparison of dollar figures from different points in time. d. allow for the comparison of dollar figures from the same point in time. ANS: C DIF: 1 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Definitional 2. Babe Ruth's 1931 salary was $80,000. Government statistics show a consumer price index of 15.2 for 1931 and 207 for 2007. Ruth's 1931 salary was equivalent to a 2007 salary of about a. $5,874. b. $1,089,474. c. $1,216,000. d. $16,560,000. ANS: B DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 3. 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 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. ANS: D DIF: 1 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Definitional Chapter 24/Measuring the Cost of Living  1665 4. In 1931, President Herbert Hoover was paid a salary of $75,000. Government statistics show a consumer price index of 15.2 for 1931 and 207 for 2007. President Hoover’s 1931 salary was equivalent to a 2007 salary of about a. $5507. b. $1,021,382. c. $1,140,000. d. $15,525,000. ANS: B DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 5. You know that a candy bar cost five cents in 1962. You also know the CPI for 1962 and the CPI for today. Which of the following would you use to compute the price of the candy bar in today's prices? a. five cents (1962 CPI / today's CPI) b. five cents ((today's CPI - 1962 CPI)/1962 CPI) c. five cents (today's CPI / 1962 CPI) d. five cents today's CPI - five cents 1962 CPI. ANS: C DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Interpretive 6. You know that a candy bar costs sixty cents today. You also know the CPI for 1962 and the CPI for today. Which of the following would you use to compute the price of the candy bar in 1962 prices? a. sixty cents (today's CPI - 1962 CPI) b. sixty cents (1962 CPI - today's CPI) c. sixty cents (today's CPI / 1962 CPI) d. sixty cents (1962 CPI / today's CPI) ANS: D DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Interpretive 7. If the CPI was 95 in 1955 and is 475 today, then $100 today purchases the same amount of goods and services as a. $4.75 purchased in 1955. b. $20.00 purchased in 1955. c. $95.00 purchased in 1955. d. $500 purchased in 1955. ANS: B DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 8. If the CPI was 85 in 1975 and is 225 today, then $100 today purchases the same amount of goods and services as a. $37.78 purchased in 1975. b. $40.00 purchased in 1975. c. $164.71 purchased in 1975. d. $264.71 purchased in 1975. ANS: A DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 1666  Chapter 24/Measuring the Cost of Living 9. If the CPI was 104 in 1967 and is 390 today, then $10 in 1967 purchased the same amount of goods and services as a. $2.67 purchases today. b. $37.50 purchases today. c. $39.00 purchases today. d. $104.00 purchases today. ANS: B DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 10. If the CPI was 108 in 1942 and is 420 today, then $10 in 1942 purchased the same amount of goods and services as a. $2.57 purchases today. b. $28.89 purchases today. c. $31.20 purchases today. d. $38.89 purchases today. ANS: D DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 11. The CPI was 196 in 2005, and the CPI was 96.5 in 1982. If your parents put aside $1,000 for you in 1982, then how much would you have needed in 2005 in order to buy what you could have bought with the $1,000 in 1982? a. $492.35 b. $1,960.00 c. $2,031.09 d. $9950.00 ANS: C DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 12. The CPI was 172 in 2007, and the CPI was 46.5 in 1982. If your parents put aside $1,000 for you in 1982, then how much would you have needed in 2007 in order to buy what you could have bought with the $1,000 in 1982? a. $270.35 b. $1,255.00 c. $2,698.92 d. $3,698.92 ANS: D DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 13. In 1969, Fritz bought a Ford Mustang for $2,500. If the price index was 36.7 in 1969 and the price index was 180 in 2006, then what is the price of the Ford Mustang in 2006 dollars? a. $509.72 b. $6,866.49 c. $9,761.58 d. $12,261.58 ANS: D DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative Chapter 24/Measuring the Cost of Living  1667 14. Ethel purchased a bag of groceries in 1970 for $8. She purchased the same bag of groceries in 2006 for $25. If the price index was 38.8 in 1970 and the price index was 180 in 2006, then what is the price of the 1970 bag of groceries in 2006 dollars? a. $5.39 b. $25.00 c. $29.11 d. $37.11 ANS: D DIF: 3 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Analytical 15. In 1949, Sycamore, Illinois built a hospital for about $500,000. In 1987, the county restored the courthouse for about $2.4 million. A price index for nonresidential construction was 14 in 1949, 92 in 1987, and 114.5 in 2000. According to these numbers, the hospital cost about a. $3.6 million in 2000 dollars, which is less than the cost of the courthouse restoration in 2000 dollars. b. $3.6 million in 2000 dollars, which is more than the cost of the courthouse restoration in 2000 dollars. c. $4.1 million in 2000 dollars, which is less than the cost of the courthouse restoration in 2000 dollars. d. $4.1 million in 2000 dollars, which is more than the cost of the courthouse restoration in 2000 dollars. ANS: D DIF: 3 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Analytical 16. 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 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. ANS: D DIF: 3 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Analytical Scenario 24-1 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. 17. Refer to Scenario 24-1. The price of a 1975 tennis ball in 2005 dollars is a. $0.03. b. $0.27. c. $0.37. d. $1.00. ANS: C DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 1668  Chapter 24/Measuring the Cost of Living 18. Refer to Scenario 24-1. In 1975 dollars, a 1975 tennis ball cost $0.10 and a 2005 tennis ball cost 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. ANS: A DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative Scenario 24-2 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. 19. Refer to Scenario 24-2. The price of a 1975 golf ball in 2005 dollars is a. $0.05. b. $0.53. c. $0.73. d. $2.00. ANS: C DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 20. Refer to Scenario 24-2. In 1975 dollars, a 1975 golf ball cost $0.20 and a 2005 golf ball cost a. $0.55, so golf balls were cheaper in 1975. b. $0.55, so golf balls were cheaper in 2005. c. $7.32, so golf balls were cheaper in 1975. d. $7.32, so golf balls were cheaper in 2005. ANS: A DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 21. Henri earned a salary of $50,000 in 2001 and $70,000 in 2006. The consumer price index was 177 in 2001 and 265.5 in 2006. Henri's 2001 salary in 2006 dollars is a. $25,000.00. b. $33,333.33. c. $44,250.00 d. $75,000.00. ANS: D DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 22. Henri earned a salary of $50,000 in 2001 and $70,000 in 2006. The consumer price index was 177 in 2001 and 265.5 in 2006. Henri's 2006 salary in 2001 dollars is a. $35,000.00. b. $46,666.67. c. $61,950.00 d. $105,000.00. ANS: B DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative Chapter 24/Measuring the Cost of Living  1669 23. Janelle earned a salary of $40,000 in 1996 and $65,000 in 2006. The consumer price index was 160 in 1996 and 266 in 2006. Janelle’s 1996 salary in 2006 dollars is a. $24,060.15. b. $42,400.00. c. $43,655.17. d. $66,500.00. ANS: D DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 24. Janelle earned a salary of $40,000 in 1996 and $65,000 in 2006. The consumer price index was 160 in 1996 and 266 in 2006. Janelle’s 2006 salary in 1996 dollars is a. $39,097.74. b. $43,062.50. c. $68,900.00. d. $108,062.50. ANS: A DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 25. Dewey earned a salary of $75,000 in 2001 and $95,000 in 2006. The consumer price index was 177 in 2001 and 266 in 2006. Dewey’s 2001 salary in 2006 dollars is a. $37,711.86. b. $49,906.02. c. $66,750.00. d. $112,711.86. ANS: D DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 26. Dewey earned a salary of $75,000 in 2001 and $95,000 in 2006. The consumer price index was 177 in 2001 and 266 in 2006. Dewey’s 2006 salary in 2001 dollars is a. $47,768.36. b. $63,214.29. c. $84,550.00. d. $142,768.36. ANS: B DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 27. Iggie took a university teaching job as an assistant professor in 1974 at a salary of $10,000. By 2003, she had been promoted to full professor, with a salary of $50,000. If the price index was 50 in 1974 and 180 in 2003, then what is Iggie's 1974 salary in 2003 dollars? a. $2,777.78 b. $18,000 c. $26,000 d. $36,000 ANS: D DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 1670  Chapter 24/Measuring the Cost of Living 28. Iggie took a university teaching job as an assistant professor in 1974 at a salary of $10,000. By 2003, she had been promoted to full professor, with a salary of $50,000. If the price index was 50 in 1974 and 180 in 2003, then what is Iggie's 2003 salary in 1974 dollars? a. $13,888.89 b. $40,000 c. $65,000 d. $180,000 ANS: A DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 29. Arlo is offered a job in Des Moines, where the CPI is 80, and a job in New York, where the CPI is 125. Arlo's job offer in Des Moines is for $42,000. How much does the New York job have to pay in order for the two salaries to represent the same purchasing power? a. $42,000 b. $65,625 c. $68,880 d. $189,000 ANS: B DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 30. 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? a. $23,040 b. $52,000 c. $79,200 d. $100,000 ANS: D DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 31. Ruben earned a salary of $60,000 in 2001 and $80,000 in 2006. The consumer price index was 177 in 2001 and 221.25 in 2006. Ruben's 2001 salary in 2006 dollars is a. $75,000; thus, Ruben's purchasing power increased between 2001 and 2006. b. $75,000; thus, Ruben's purchasing power decreased between 2001 and 2006. c. $85,000; thus, Ruben's purchasing power increased between 2001 and 2006. d. $85,000; thus, Ruben's purchasing power decreased between 2001 and 2006. ANS: A DIF: 3 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Analytical 32. Ruben earned a salary of $60,000 in 2001 and $80,000 in 2006. The consumer price index was 177 in 2001 and 221.25 in 2006. Ruben's 2006 salary in 2001 dollars is a. $20,000; thus, Ruben's purchasing power increased between 2001 and 2006. b. $20,000; thus, Ruben's purchasing power decreased between 2001 and 2006. c. $64,000; thus, Ruben's purchasing power increased between 2001 and 2006. d. $64,000; thus, Ruben's purchasing power decreased between 2001 and 2006. ANS: C DIF: 3 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Analytical Chapter 24/Measuring the Cost of Living  1671 33. 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, 60 in 1980, and 100 in 1990, then in real terms, Professor Plum's salary was highest in a. 1980 and lowest in 1970. b. 1980 and lowest in 1990. c. 1990 and lowest in 1970. d. 1990 and lowest in 1980. ANS: A DIF: 3 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Analytical 34. 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 a. 1970 and lowest in 1980. b. 1970 and lowest in 1990. c. 1980 and lowest in 1970. d. 1980 and lowest in 1990. ANS: D DIF: 3 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Analytical Scenario 24-3 Grant Gant was a doctor in 1944 and earned $12,000 that year. His daughter, Gretta Gant, is a doctor today and she earned $210,000 in 2005. The price index was 17.6 in 1944 and 184 in 2005. 35. Refer to Scenario 24-3. Grant Gant’s 1944 income in 2005 dollars is a. $1,147.83. b. $113,454.55. c. $125,454.55. d. $1,996,800.00. ANS: C DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 36. Refer to Scenario 24-3. Gretta Gant’s 2005 income in 1944 dollars is a. $11,931.82. b. $20,086.96. c. $1,985,454.55. d. $2,195,454.55. ANS: B DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 37. Refer to Scenario 24-3. In real terms, Gretta Gant’s income amounts to about what percentage of Grant Gant’s income? a. 67 percent b. 167 percent c. 1045 percent d. 1750 percent ANS: B DIF: 3 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Analytical 1672  Chapter 24/Measuring the Cost of Living 38. Refer to Scenario 24-3. In real terms, Grant Gant’s income amounts to about what percentage of Gretta Gant’s income? a. 5.71 percent b. 9.6 percent c. 59.7 percent d. 67.4 percent ANS: C DIF: 3 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Analytical Scenario 24-4 Quinn has job offers in Wrexington and across the country in Charlieville. The Wrexington job would pay a salary of $50,000 per year, and the Charlieville job would pay a salary of $40,000 per year. The CPI in Wrexington is 150, and the CPI in Charlieville is 90. 39. Refer to Scenario 24-4. The Wrexington salary in Charlieville dollars is a. $30,000.00. b. $33,333.33. c. $45,000.00 d. $83,333.33. ANS: A DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 40. Refer to Scenario 24-4. The Charlieville salary in Wrexington dollars is a. $24,000.00. b. $26,666.67. c. $60,000.00 d. $66,666.67. ANS: D DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 41. Refer to Scenario 24-4. If Quinn only cares about maximizing her purchasing power, then she should a. take the Charlieville job. b. take the Wrexington job. c. take either job because they both have the same purchasing power. d. The answer cannot be determined from the information given because a salary is not the same as purchasing power. ANS: A DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 42. 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 a. 116.67. b. 131.08. c. 397.44. d. 505.44. ANS: D DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative Chapter 24/Measuring the Cost of Living  1673 43. Suppose today’s CPI is 134.85, and suppose one must spend $580 today to purchase the same basket of goods and services that could be bought for $400 in 1989. Then the CPI in 1989 was a. 24.27. b. 60.68. c. 93.00. d. 195.53. ANS: C DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 44. In 1964, one could buy a chili dog and a root beer for $1.25. Today the same chili dog and root beer cost $2.95. Which pair of CPIs would imply that the cost in today's dollars was the same for both meals? a. 60 in 1964 and 141.6 today b. 75 in 1964 and 126.4 today c. 80 in 1964 and 112 today d. 90 in 1964 and 108.5 today ANS: A DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 45. In 1972, one could buy a bag of chips, a pound of hamburger, a package of buns, and a small bag of charcoal for about $2.50. If the same goods today cost $6.00, then which pair of CPIs would make the cost in today's dollars the same for both years? a. 60 in 1972 and 150 today b. 65 in 1972 and 156 today c. 75 in 1972 and 160 today d. 90 in 1972 and 145.8 today ANS: B DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 46. In 1972, one could buy model rocket engines for $1.50 each. If those same engines cost $2.50 each today, then which pair of CPIs would make the engine prices in today's dollars the same for both years? a. 60 in 1972 and 95 today b. 60 in 1972 and 120 today c. 90 in 1972 and 140 today d. 96 in 1972 and 160 today ANS: D DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 47. Piper is offered a job in Seattle that pays $50,000 and a job in Boston that pays $60,000. Which pair of CPIs would make the two salaries have the same purchasing power? a. 80 in Seattle and 100 in Boston b. 125 in Seattle and 150 in Boston c. 100 in Seattle and 124.5 in Boston d. 100 in Seattle and 140 in Boston ANS: B DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 1674  Chapter 24/Measuring the Cost of Living 48. Mavis is offered a Job in Minneapolis that pays $80,000. She is offered a similar job in Memphis that pays $64,000. Which pair of CPIs would make the two salaries have the same purchasing power? a. 90 in Minneapolis and 80 in Memphis b. 90 in Minneapolis and 72 in Memphis c. 90 in Minneapolis and 66 in Memphis d. 90 in Minneapolis and 50 in Memphis ANS: B DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Comparing dollar figures MSC: Applicative 49. When box office receipts are corrected for inflation, the most popular movie of all time is a. Star Wars. b. Titanic. c. Gone With the Wind. d. The Sound of Music. ANS: C NAT: Analytic MSC: Definitional 50. Inflation DIF: 1 REF: 24-2 LOC: The study of economics and definitions of economics MSC: Definitional A COLA automatically raises the wage when a. GDP increases. b. taxes increase. c. the consumer price index increases. d. the producer price index increases. ANS: C NAT: Analytic TOP: COLA 52. TOP: Indexation refers to a. a process of adjusting the nominal interest rate so that it is equal to the real interest rate. b. using a law or contract to automatically correct a dollar amount for the effects of inflation. c. using a price index to deflate dollar values. d. an adjustment made by the Bureau of Labor Statistics to the CPI so that the index is in line with the GDP deflator. ANS: B NAT: Analytic TOP: Indexation 51. DIF: 1 REF: 24-2 LOC: Unemployment and inflation DIF: 1 REF: 24-2 LOC: The study of economics and definitions of economics MSC: Definitional 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 $7.50 an hour and is scheduled to index their wages today. If the CPI is currently 130 and was 125 a year ago, the firm should increase the hourly wages of its workers by a. $0.04. b. $0.29. c. $0.30. d. $0.50. ANS: C NAT: Analytic TOP: Indexation DIF: 2 REF: 24-2 LOC: The study of economics and definitions of economics MSC: Applicative Chapter 24/Measuring the Cost of Living  1675 53. 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 a. $0.25. b. $1.60. c. $2.00. d. $2.56. ANS: C NAT: Analytic TOP: Indexation 54. DIF: 2 REF: 24-2 LOC: The study of economics and definitions of economics MSC: Applicative Social Security payments are indexed for inflation using the CPI. A recent newspaper editorial claimed that Social Security recipients are harmed by years of low inflation because they do not receive as large an increase in their payments as they do in years of high inflation. Which of the following statements is correct? a. The newspaper editorial is correct under all circumstances. b. The newspaper editorial is correct if the market basket consumed by Social Security recipients is the same as the market basket used to compute the CPI. c. The newspaper editorial could be correct if the prices of the goods consumed by Social Security recipients change at a different rate than the prices of the goods in the market basket used to compute the CPI d. The newspaper editorial is incorrect under all circumstances. ANS: C DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Social Security | Indexation MSC: Interpretive 55. Of Social Security benefits and federal income tax brackets, which is indexed? a. Both are indexed. b. Only Social Security benefits are indexed. c. Only federal income tax brackets are indexed. d. Neither is indexed. ANS: A NAT: Analytic TOP: Indexation 56. Marion collected Social Security payments of $220 a month in 1985. If the price index rose from 90 to 108 between 1985 and 1986, then her Social Security payments for 1986 should have been a. $228. b. $238. c. $257. d. $264. ANS: D NAT: Analytic TOP: Indexation 57. DIF: 2 REF: 24-2 LOC: The study of economics and definitions of economics MSC: Interpretive DIF: 2 REF: 24-2 LOC: The study of economics and definitions of economics MSC: Applicative Marion collected Social Security payments of $250 a month in 1985. If the price index rose from 90 to 108 between 1985 and 1986, then her Social Security payments for 1986 should have been a. $268. b. $292. c. $300. d. $358. ANS: C NAT: Analytic TOP: Indexation DIF: 2 REF: 24-2 LOC: The study of economics and definitions of economics MSC: Applicative 1676  Chapter 24/Measuring the Cost of Living 58. Which of the following statements is correct about the relationship between inflation and interest rates? 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. ANS: D DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Interest rates | Inflation MSC: Interpretive 59. Which of the following is not correct? a. If the inflation rate exceeds the nominal interest rate, then the purchasing power of an interestearning deposit falls over time. b. If there is deflation, then the purchasing power of an interest-earning deposit rises by more than the nominal interest rate over time. c. The higher the rate of inflation, the smaller the increase in the purchasing power of an interestearning deposit. d. The purchasing power of an interest-earning deposit can increase or decrease over time, but it cannot stay the same. ANS: D DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Interest rates | Inflation MSC: Interpretive 60. Which of the following statements is correct about the relationship between the nominal interest rate and the real interest rate? a. The real interest rate is the nominal interest rate times the rate of inflation. b. The real interest rate is the nominal interest rate minus the rate of inflation. c. The real interest rate is the nominal interest rate plus the rate of inflation. d. The real interest rate is the nominal interest rate divided by the rate of inflation. ANS: B DIF: 1 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Nominal interest rate | Real interest rate MSC: Definitional 61. The nominal interest rate tells you a. how fast the number of dollars in your bank account rises over time. b. how fast the purchasing power of your bank account rises over time. c. the number of dollars in your bank account today. d. the purchasing power of your bank account today. ANS: A DIF: 1 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Nominal interest rate MSC: Definitional 62. The real interest rate tells you a. how fast the number of dollars in your bank account rises over time. b. how fast the purchasing power of your bank account rises over time. c. the number of dollars in your bank account today. d. the purchasing power of your bank account today. ANS: B DIF: 1 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Real interest rate MSC: Definitional Chapter 24/Measuring the Cost of Living  1677 63. Which of the following statements about real and nominal interest rates is correct? a. Real interest rates can be either positive or negative, but nominal interest rates must be positive. b. Real interest rates and nominal interest rates must be positive. c. Real interest rates must be positive, but nominal interest rates can be either positive or negative. d. Real interest rates and nominal interest rates can be either positive or negative. ANS: A DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Nominal interest rate | Real interest rate MSC: Interpretive 64. Which of the following statements about real and nominal interest rates is correct? a. When the nominal interest rate is rising, the real interest rate is necessarily rising; when the nominal interest rate is falling, the real interest rate is necessarily falling. b. If the nominal interest rate is 4 percent and the inflation rate is 3 percent, then the real interest rate is 7 percent. c. An increase in the real interest rate is necessarily accompanied by either an increase in the nominal interest rate, an increase in the inflation rate, or both. d. When the inflation rate is positive, the nominal interest rate is necessarily greater than the real interest rate. ANS: D DIF: 3 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Nominal interest rate | Real interest rate MSC: Analytical 65. As long as prices are rising over time, then a. the nominal interest rate exceeds the real interest rate. b. the real interest rate exceeds the nominal interest rate. c. the real interest rate is positive. d. the nominal interest rate is a better indicator than the real interest rate of how fast the purchasing power of your bank account is changing over time. ANS: A DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Nominal interest rate | Real interest rate MSC: Interpretive 66. If the nominal interest rate is 8 percent and the rate of inflation is 3 percent, then the real interest rate is a. -5 percent. b. 1.67 percent. c. 5 percent. d. 11 percent. ANS: C DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Real interest rate MSC: Applicative 67. If the nominal interest rate is 6 percent and the rate of inflation is 2 percent, then the real interest rate is a. -4 percent. b. 2 percent. c. 4 percent. d. 8 percent. ANS: C DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Real interest rate MSC: Applicative 68. If the nominal interest rate is 6 percent and the rate of inflation is 9 percent, then the real interest rate is a. -3 percent. b. -0.33 percent. c. 3 percent. d. 15 percent. ANS: A DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Real interest rate MSC: Applicative 1678  Chapter 24/Measuring the Cost of Living 69. If the nominal interest rate is 5 percent and the rate of inflation is 9 percent, then the real interest rate is a. -4 percent. b. -0.44 percent. c. 4 percent. d. 14 percent. ANS: A DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Real interest rate MSC: Applicative 70. If the nominal interest rate is 1.5 percent and the rate of inflation is -0.5 percent, then the real interest rate is a. -4 percent. b. -2 percent. c. 1 percent. d. 2 percent. ANS: D DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Real interest rate MSC: Applicative 71. If the nominal interest rate is 7.5 percent and the rate of inflation is -2.5 percent, then the real interest rate is a. -10 percent. b. -5 percent. c. 5 percent. d. 10 percent. ANS: D DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Real interest rate MSC: Applicative 72. If the nominal interest rate is 8 percent and the real interest rate is 5.5 percent, then the inflation rate is a. -2.5 percent. b. 0.45 percent. c. 2.5 percent. d. 13.5 percent. ANS: C NAT: Analytic MSC: Applicative 73. TOP: Inflation rate If the nominal interest rate is 8 percent and the real interest rate is 4.5 percent, then the inflation rate is a. -3.5 percent. b. 0.78 percent. c. 3.5 percent. d. 12.5 percent. ANS: C NAT: Analytic MSC: Applicative 74. DIF: 2 REF: 24-2 LOC: Unemployment and inflation DIF: 2 REF: 24-2 LOC: Unemployment and inflation TOP: Inflation rate If the nominal interest rate is 7 percent and the real interest rate is -2.5 percent, then the inflation rate is a. -9.5 percent. b. -4.5 percent. c. 4.5 percent. d. 9.5 percent. ANS: D NAT: Analytic MSC: Applicative DIF: 2 REF: 24-2 LOC: Unemployment and inflation TOP: Inflation rate Chapter 24/Measuring the Cost of Living  1679 75. If the nominal interest rate is 4 percent and the real interest rate is -2.5 percent, then the inflation rate is a. -6.5 percent. b. -1.5 percent. c. 1.5 percent. d. 6.5 percent. ANS: D NAT: Analytic MSC: Applicative 76. Inflation rate DIF: 2 REF: 24-2 LOC: Unemployment and inflation TOP: Inflation rate If the nominal interest rate is 5 percent and the real interest rate is 7 percent, then the inflation rate is a. -2 percent. b. 0.4 percent. c. 2 percent. d. 12 percent. ANS: A NAT: Analytic MSC: Applicative 78. TOP: If the nominal interest rate is 4 percent and the real interest rate is 7 percent, then the inflation rate is a. -3 percent. b. 0.75 percent. c. 3 percent. d. 11 percent. ANS: A NAT: Analytic MSC: Applicative 77. DIF: 2 REF: 24-2 LOC: Unemployment and inflation DIF: 2 REF: 24-2 LOC: Unemployment and inflation TOP: Inflation rate The consumer price index was 225 in 2006 and 234 in 2007. The nominal interest rate during this period was 6.5 percent. What was the real interest rate during this period? a. 2.5 percent b. 4.0 percent c. 6.76 percent d. 10.5 percent ANS: A DIF: 3 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Real interest rate MSC: Analytical 79. The consumer price index was 225 in 2006 and 236 in 2007. The nominal interest rate during this period was 6.5 percent. What was the real interest rate during this period? a. 1.6 percent b. 4.9 percent c. 6.82 percent d. 11.4 percent ANS: A DIF: 3 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Real interest rate MSC: Analytical 80. During a certain year, the consumer price index increased from 150 to 159 and the purchasing power of a person’s bank account increased by 3.5 percent. For that year, a. the nominal interest rate was 6 percent. b. the nominal interest rate was 9.5 percent. c. the inflation rate was 3.5 percent. d. the inflation rate was 9.5 percent. ANS: B DIF: 3 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Nominal interest rate MSC: Analytical 1680  Chapter 24/Measuring the Cost of Living 81. The CPI was 120 in 2000 and 132 in 2001. Dorgan borrowed money in 2000 and repaid the loan in 2001. If the nominal interest rate on the loan was 12 percent, then the real interest rate was a. 2 percent. b. 10 percent. c. 12 percent. d. 22 percent. ANS: A DIF: 3 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Real interest rate MSC: Analytical 82. Suppose that over the past year, the real interest rate was 3 percent and the inflation rate was -1 percent. It follows that a. the dollar value of savings increased at 2 percent, and the purchasing power of savings increased at 3 percent. b. the dollar value of savings increased at 2 percent, and the purchasing power of savings increased at 4 percent. c. the dollar value of savings increased at 4 percent, and the purchasing power of savings increased at 2 percent. d. the dollar value of savings increased at 4 percent, and the purchasing power of savings increased at 3 percent. ANS: A DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Nominal interest rate | Real interest rate MSC: Applicative 83. Suppose that over the past year, the real interest rate was 6 percent and the inflation rate was -2 percent. It follows that a. the dollar value of savings increased at 4 percent, and the purchasing power of savings increased at 6 percent. b. the dollar value of savings increased at 4 percent, and the purchasing power of savings increased at 8 percent. c. the dollar value of savings increased at 8 percent, and the purchasing power of savings increased at 4 percent. d. the dollar value of savings increased at 8 percent, and the purchasing power of savings increased at 6 percent. ANS: A DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Nominal interest rate | Real interest rate MSC: Applicative 84. Suppose that over the past year, the real interest rate was 5 percent and the inflation rate was 3 percent. It follows that a. the dollar value of savings increased at 5 percent, and the purchasing power of savings increased at 2 percent. b. the dollar value of savings increased at 5 percent, and the purchasing power of savings increased at 8 percent. c. the dollar value of savings increased at 8 percent, and the purchasing power of savings increased at 2 percent. d. the dollar value of savings increased at 8 percent, and the purchasing power of savings increased at 5 percent. ANS: D DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Nominal interest rate | Real interest rate MSC: Applicative Chapter 24/Measuring the Cost of Living  1681 85. Suppose that over the past year, the real interest rate was 6 percent and the inflation rate was 4 percent. It follows that a. the dollar value of savings increased at 6 percent, and the purchasing power of savings increased at 2 percent. b. the dollar value of savings increased at 6 percent, and the purchasing power of savings increased at 10 percent. c. the dollar value of savings increased at 10 percent, and the purchasing power of savings increased at 2 percent. d. the dollar value of savings increased at 10 percent, and the purchasing power of savings increased at 6 percent. ANS: D DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Nominal interest rate | Real interest rate MSC: Applicative 86. Ralph puts money in the bank and earns a 5 percent nominal interest rate. If the inflation rate is 2 percent, then after one year, a. Ralph will have 3 percent more money, which will purchase 5 percent more goods. b. Ralph will have 3 percent more money, which will purchase 7 percent more goods. c. Ralph will have 5 percent more money, which will purchase 3 percent more goods. d. Ralph will have 5 percent more money, which will purchase 7 percent more goods. ANS: C DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Nominal interest rate | Real interest rate MSC: Applicative 87. Sophia deposits $1,000 in a savings account that pays an annual interest rate of 4 percent. Over the course of a year, the inflation rate is 1 percent. At the end of the year, Sophia has a. $30 more in her account, and her purchasing power has increased by $10. b. $30 more in her account, and her purchasing power has increased by $40. c. $40 more in her account, and her purchasing power has increased by $30. d. $50 more in her account and her purchasing power has increased by $40. ANS: C DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Nominal interest rate | Real interest rate MSC: Applicative 88. Maxine deposits $100 in a bank account that pays an annual interest rate of 20%. A year later, after Maxine has accumulated $20 in interest, she withdraws her $120. Maxine’s purchasing power a. did not change if the inflation rate was 0%. b. decreased if the inflation rate was -2%. c. increased if the inflation rate was 5%. d. More than one of the above is correct. ANS: C DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Interest rates | Inflation rate MSC: Applicative 89. 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 a. -4 percent. b. 4 percent. c. 6 percent. d. 14 percent. ANS: D NAT: Analytic MSC: Applicative DIF: 2 REF: 24-2 LOC: Unemployment and inflation TOP: Inflation rate 1682  Chapter 24/Measuring the Cost of Living 90. Ms. Take borrowed $1,000 from her bank for one year at an interest rate of 10 percent. During that year, the price level went up by 15 percent. Which of the following statements is correct? a. Ms. Take will repay the bank fewer dollars than she initially borrowed. b. Ms. Take's repayment will give the bank less purchasing power than it originally loaned her. c. Ms. Take's repayment will give the bank greater purchasing power than it originally loaned her. d. Ms. Take's repayment will give the bank the same purchasing power that it originally loaned her. ANS: B DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Nominal interest rate | Real interest rate MSC: Applicative 91. Which of the following is not correct? a. The U.S. economy has never experienced deflation. b. Since 1965, the U.S. nominal interest rate has exceeded the U.S. real interest rate. c. Since 1965, the U.S. economy has experienced rising consumer prices every year. d. During deflation, the real interest rate exceeds the nominal interest rate. ANS: A DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: U.S. interest rates | U.S. inflation rate MSC: Interpretive 92. Which of the following is correct? 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. ANS: C DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: Nominal interest rate | Real interest rate MSC: Interpretive 93. In the United States in the late 1970s, nominal interest rates were high and inflation rates were very high. As a result, real interest rates were a. very high. b. high. c. low, but never negative. d. low, and in some years they were negative. ANS: D DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: U.S. interest rates MSC: Interpretive 94. In the United States, nominal interest rates were a. high in the 1970s and 1990s. b. low in the 1970s and 1990s. c. high in the 1970s and low in the 1990s. d. low in the 1970s and high in the 1990s. ANS: C DIF: 1 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: U.S. interest rates MSC: Definitional 95. In the United States, real interest rates were a. high in the 1970s and 1990s. b. low in the 1970s and 1990s. c. high in the 1970s and low in the 1990s. d. low in the 1970s and high in the 1990s. ANS: D DIF: 1 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions of economics TOP: U.S. interest rates MSC: Definitional

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