Question 1

Many economists believe the bias in the CPI is now only about half as large as it once was.

Accepted Answer

A) True 
 B)False

Question 2

The consumer price index was 225 in 2008 and 232.2 in 2009. The nominal interest rate during this period was 6.5 percent. What was the real interest rate during this period?

Accepted Answer

A)   1.6 percent
B)   3.3 percent
C)   5.1 percent
D)   7.4 percentE) A) and D)
F) B) and C)

Question 3

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?

Accepted Answer

A)   80 to 100
B)   100 to 120
C)   150 to 170
D)   All of these changes produce the same rate of inflation.E) None of the above
F) A) and C)

Question 4

By keeping the basket of goods and services the same when computing the CPI, the Bureau of Labor Statistics isolates the effects of price changes from the effect of any quantity changes that might be occurring at the same time.

Accepted Answer

A) True 
 B)False

Question 5

The goal of the consumer price index is to measure changes in the

Accepted Answer

A)   costs of production.
B)   cost of living.
C)   relative prices of consumer goods.
D)   production of consumer goods.E) B) and C)
F) None of the above

Question 6

Substitution bias causes the CPI to understate the increase in the cost of living from one year to the next.

Accepted Answer

A) True 
 B)False

Question 7

In the United States, nominal interest rates were

Accepted Answer

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

Question 8

Scenario 6-3
Sue Holloway was an accountant in 1944 and earned $12,000 that year. Her son, Josh Holloway, is an accountant today and he earned $210,000 in 2008. The price index was 17.6 in 1944 and 184 in 2008.
-Refer to Scenario 6-3. Josh Holloway's 2008 income in 1944 dollars is

Accepted Answer

A)   $11,931.82.
B)   $20,086.96.
C)   $1,985,454.55.
D)   $2,195,454.55.E) All of the above
F) A) and D)

Question 9

When ranking movies by nominal box office receipts, what important fact is overlooked?

Accepted Answer

A)   More people go to movies now than in the past.
B)   There are no good substitutes for movies currently.
C)   Prices, including those for movie tickets, have been rising over time.
D)   Movies and DVD are complements.E) B) and D)
F) All of the above

Question 10

The consumer price index is used to

Accepted Answer

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

Question 11

The producer price index measures the cost of a basket of goods and services

Accepted Answer

A)   typically produced in the economy.
B)   produced for a typical consumer.
C)   sold by producers.
D)   bought by firms.E) A) and C)
F) C) and D)

Question 12

If 2002 is the base year, then the inflation rate in 2005 equals

Accepted Answer

A)  
B)  
C)  
D)  E) A) and C)
F) A) and B)

Question 13

What basket of goods and services is used to construct the CPI?

Accepted Answer

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 expendituresE) A) and B)
F) A) and C)

Question 14

The substitution bias in the consumer price index refers to the

Accepted Answer

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.E) A) and D)
F) None of the above

Question 15

Why does the GDP deflator give a different rate of inflation than the CPI?

Accepted Answer

The GDP deflator and the CPI differ in t...

Question 16

By far the largest category of goods and services in the CPI basket is

Accepted Answer

A)   housing.
B)   transportation.
C)   education & communication.
D)   food & beverages.E) A) and B)
F) B) and D)

Question 17

If the cost of transportation increases by 20 percent, then, other things the same, the CPI is likely to increase by about

Accepted Answer

A)   0.3 percent.
B)   1.7 percent.
C)   3.4 percent.
D)   10 percent.E) A) and B)
F) None of the above

Question 18

A 2009 Chevrolet model has more horsepower than the 2008 version and is included in the BLS basket of goods. BLS attempts to account for this change in the market basket by

Accepted Answer

A)   dropping the good from the basket.
B)   substituting in a different vehicle with the same horsepower as the 2008 model.
C)   adjusting the share of the market basket allocated to transportation.
D)   adjusting the price of the good to account for the quality change.E) A) and B)
F) All of the above

Question 19

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

Accepted Answer

A)   119.27.
B)   120.2.
C)   129.8.
D)   131.E) None of the above
F) A) and B)

Question 20

If the nominal interest rate is 8 percent and the real interest rate is 5.5 percent, then the inflation rate is

Accepted Answer

A)   -2.5 percent.
B)   0.45 percent.
C)   2.5 percent.
D)   13.5 percent.E) All of the above
F) A) and B)

Exam 6: Measuring the Cost of Living

The goal of the consumer price index is to measure changes in the

Correct AnswerverifiedShow Answer

Substitution bias causes the CPI to understate the increase in the cost of living from one year to the next.

Correct AnswerverifiedShow Answer

The consumer price index was 225 in 2008 and 232.2 in 2009. The nominal interest rate during this period was 6.5 percent. What was the real interest rate during this period?

Correct AnswerverifiedShow Answer

If 2002 is the base year, then the inflation rate in 2005 equals

Correct AnswerverifiedShow Answer

What basket of goods and services is used to construct the CPI?

Correct AnswerverifiedShow Answer

When ranking movies by nominal box office receipts, what important fact is overlooked?

Correct AnswerverifiedShow Answer

The consumer price index is used to

Correct AnswerverifiedShow Answer

The substitution bias in the consumer price index refers to the

Correct AnswerverifiedShow Answer

A 2009 Chevrolet model has more horsepower than the 2008 version and is included in the BLS basket of goods. BLS attempts to account for this change in the market basket by

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

If the nominal interest rate is 8 percent and the real interest rate is 5.5 percent, then the inflation rate is

Correct AnswerverifiedShow Answer

Many economists believe the bias in the CPI is now only about half as large as it once was.

Correct AnswerverifiedShow Answer

Why does the GDP deflator give a different rate of inflation than the CPI?

Correct AnswerverifiedThe GDP deflator and the CPI differ in t...View AnswerShow Answer

In the United States, nominal interest rates were

Correct AnswerverifiedShow Answer

If the cost of transportation increases by 20 percent, then, other things the same, the CPI is likely to increase by about

Correct AnswerverifiedShow Answer

By far the largest category of goods and services in the CPI basket is

Correct AnswerverifiedShow Answer

Scenario 6-3 Sue Holloway was an accountant in 1944 and earned $12,000 that year. Her son, Josh Holloway, is an accountant today and he earned $210,000 in 2008. The price index was 17.6 in 1944 and 184 in 2008. -Refer to Scenario 6-3. Josh Holloway's 2008 income in 1944 dollars is

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The producer price index measures the cost of a basket of goods and services

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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The GDP deflator and the CPI differ in t...
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