Econ 231, Chapter 16: CPI and Inflation
1.The CPI is a measure of the overall cost of
a. inputs purchased by a typical producer.
b. goods and services bought by a typical consumer.
c. goods and services produced in the economy.
d. stocks on the New York Stock Exchange.
Table 16-1
Year
2005
2006
Peaches
$11 per bushel
$9 per bushel
Pecans
$6 per bushel
$10 per bushel
2. Refer to Table 16-1. Suppose the typical consumer basket consists of 10 bushels of
peaches and 15 bushels of pecans. Using 2005 as the base year, the CPI for 2006 is
a. 100.
b. 120.
c. 200.
d. 240.
3. Refer to Table 16-1. Suppose the typical consumer basket consists of 10 bushels of
peaches and 15 bushels of pecans. Using 2005 as the base year, what was the inflation rate
in 2006?
a. 20 percent
b. 16.7 percent
c. 10 percent
d. 8 percent
Table 16-4
The table below pertains to an economy with only two goods -- books and calculators. The
fixed basket consists of 5 books and 10 calculators.
Year
2006
2007
2008
Price of books
$24
30
32
Price of calculators
$8
12
15
4. Refer to Table 16-4. Using 2006 as the base year, the consumer price index is
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, 270 in 2007, and 310 in 2008.
d. 200 in 2006, 540 in 2007, and 620 in 2008.
5. Refer to Table 16-4. Using 2006 as the base year, the inflation rate is
a. 13.3 percent for 2007 and 14.8 percent for 2008.
b. 35 percent for 2007 and 14.8 percent for 2008.
c. 35 percent for 2007 and 55 percent for 2008.
d. 135 percent for 2007 and 155 percent for 2008.
6. 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 bought by the typical consumer, nor the number of pears
bought by the typical consumer, changes from year to year.
c. the percentage change in the price of applies is equal to the percentage change in the
price of pears from year to year.
d. All of the above are correct.
7. Let 2004 be the base year; then
CPI in 2005  CPI in 2004
 100.
CPI in 2004
CPI in 2005  CPI in 2004
 100.
b. Inflation rate in 2005 =
CPI in 2005
CPI in 2004  CPI in 2005
 100.
c. Inflation rate in 2005 =
CPI in 2004
CPI in 2004  CPI in 2005
 100.
d. Inflation rate in 2005 =
CPI in 2005
a. Inflation rate in 2005 =
8.Let 2002 be the base year; then
CPI in 2005  CPI in
CPI in 2002
CPI in 2005  CPI in
b. Inflation rate in 2005 =
CPI in 2005
CPI in 2005  CPI in
c. Inflation rate in 2005 =
CPI in 2004
CPI in 2005  CPI in
d. Inflation rate in 2005 =
CPI in 2004
a. Inflation rate in 2005 =
2004
 100.
2002
 100.
2002
 100.
2004
 100.
9.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.
10.The producer price index measures the cost of a basket of goods and services
a. typical of those produced in the economy.
b. produced for a typical consumer.
c. sold by producers.
d. bought by firms.
11. 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 some 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 final goods and
services bought by consumers.
d. the GDP deflator reflects the prices of all goods and services bought by producers and
consumers, whereas the consumer price index reflects the prices of final goods and
services bought by consumers.
12. If the prices of Australian-made shoes imported into the United States increase, then, as a
result,
a. both the GDP deflator and the consumer price index increase.
b. neither the GDP deflator nor the consumer price index increases.
c. the GDP deflator increases but the consumer price index does not increase.
d. the consumer price index will increase, but the GDP deflator will not increase.
13. An increase 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.
14. By itself, a reduction in the price of large tractors imported into the United States from Russia
a. decreases the GDP deflator and increases the consumer price index.
b. increases the GDP deflator but leaves the consumer price index unchanged.
c. increases both the GDP deflator and the consumer price index.
d. leaves both the GDP deflator and the consumer price index unchanged.
15. 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.
16. The consumer price index (CPI) 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.
ANSWERS
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
b
b
a
a
b
b
a
d
d
d
b
d
c
d
a
d