1. The measure of the cost of a standard basket of goods and services in any period relative to the cost of the same basket of goods and services in the base year is called the:
A. cost-of-living indicator.
B. consumption production index.
C. consumer production index.
D. consumer price index.
2. The CPI is a measure of the:
A. real wage.
B. price of a specific good or service.
C. rate of inflation.
D. average level of prices relative to prices in the base year.
3. Suppose that the total expenditures for a typical household in 2000 equaled $5,500 per month, while the cost of purchasing exactly the same items in 2005 was $6,875. If 2000 is the base year, the CPI for the year 2005 equals:
A. 0.80
B. 1.00
C. 1.20
D. 1.25
4. If the total expenditures of a typical family equaled $35,000 per year in 2000 and the exact same basket of goods and services cost $40,000 in the year 2005, the family's cost of living:
A. increased by 14 percent.
B. decreased by 12.5 percent.
C. decreased by 14 percent.
D. increased by 12.5 percent.
5. The typical family on the Planet Econ consumes 10 pizzas, 7 pairs of jeans, and 20 gallons of milk. In 2004 pizzas cost $10 each, jeans cost $40 per pair, and milk cost $3 per gallon. In 2005, the price of pizzas increased to $14 each, while the price of jeans and milk remained the same. Between 2004 and 2005, a typical family's cost of living:
A. increased by 9 percent.
B. decreased by 9 percent.
C. remained the same.
D. increased by 40 percent.
6. If the Consumer Price Index increased from 1.52 to 1.65, then it must be the case that _____ relative to prices in the base year.
A. all prices rose
B. the weighted average level of prices rose
C. all prices fell
D. some prices rose and some prices fell
7. A measure of the average price of a given class of goods or services relative to the price of the same goods and services in a base year is called a:
A. real price.
B. real quantity.
C. rate of inflation.
D. price index.
8. The annual percentage rate of change in the price level is the:
A. relative price.
B. Fisher effect.
C. cost of living.
D. rate of inflation.
9. The CPI in 1974 equaled 0.49. The CPI in 1975 equaled 0.54. The rate of inflation between 1974 and 1975 was ____ percent.
A. 5.4
B. 9.0
C. 9.3
D. 10.2
10. The CPI in 1930 equaled 0.17. The CPI in 1931 equaled 0.15. The rate of inflation between 1930 and 1931 was ____ percent.
A. -13.3
B. -11.8
C. 1.5
D. 11.8
11. A nominal quantity is measured:
A. in physical terms.
B. in terms of current dollar value.
C. using the consumer price index.
D. by indexing.
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12. Deflating a nominal quantity is the process of dividing a ____ quantity by a ______ in order to express the quantity in ______ terms.
A. nominal; real quantity; nominal
B. nominal; nominal quantity; real
C. real; nominal quantity; real
D. nominal; price index; real
13. To compare the purchasing power of nominal wages in two different years, one must:
A. compare the nominal values.
B. deflate both quantities by a common price index.
C. increase both quantities by the same percentage increase in a price index.
D. adjust both quantities by the real interest rate.
14. The price of a gallon of gasoline at the pump increased by 10 percent at the same time that the inflation rate was 15 percent. The nominal price of gasoline _____ and the real price of gasoline _____.
A. increased; increased
B. increased; decreased
C. increased; did not change
D. decreased; increased
15. If the CPI equaled 1.00 in 1995 and 1.65 in 2005 and a typical household's income equaled $35,000 in 1995 and $40,000 in 2005, then between 1995 and 2005, real household
income:
A. increased.
B. decreased.
C. was constant.
D. may have increased or decreased.
16. One family earned an income of $28,000 in 1990. Over the next five years, their income increased by 15%, while the CPI increased by 15%. After five years, this family's nominal income ______ and their real income ______.
A. decreased; decreased
B. decreased; increased
C. increased; did not change
D. increased; increased
17. The price of a gallon of gasoline was $0.35 in 1972 when the CPI equaled 0.418. The cost of a gallon of gasoline was $2.25 in 2005 when the CPI equaled 1.91. The real cost of a gallon of gasoline between 1972 and 2005:
A. increased.
B. decreased.
C. remained constant.
D. may have either increased or decreased.
18. If workers received a 5 percent wage increase and the rate of inflation was 10 percent, then their real wage:
A. increased.
B. decreased.
C. remained constant.
D. equaled the nominal wage.
19. A report indicated that the average real wage in manufacturing declined by 2% between 1990 and 2000. If the CPI equaled 1.30 in 1990, 1.69 in 2000, and the average nominal wage in manufacturing was $35 in 2000, what was the average nominal wage in manufacturing in 1990?
A. $20.71
B. $21.12
C. $26.92
D. $27.46
20. The practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index is called:
A. a substitution bias.
B. the Fisher effect.
C. deflating.
D. indexing.
21. If you wish to maintain a constant purchasing power when you retire, you should choose retirement income options that are:
A. deflated.
B. nominal.
C. indexed.
D. inflated.
22. A labor contract provides for a first-year wage of $10 per hour, and specifies that the real wage will rise by 3 percent in the second year of the contract. The CPI is 1.00 in the first year and 1.07 in the second year. What dollar wage must be paid in the second year?
A. $10.00
B. $10.30
C. $10.70
D. $11.02
23. Two methods used to adjust nominal values for inflation are:
A. substituting and complementing.
B. indexing and deflating.
C. aggregating and disaggregating.
D. real and nominal.
24. When statisticians fail to take into account improvements in the quality of goods and services, the CPI will tend to ______ the rate of inflation.
A. understate
B. precisely measure
C. be unrelated to
D. overstate
25. Product improvements make it difficult for the statisticians who construct the CPI to distinguish between ____ changes and _____ changes.
A. price; quality
B. quantity; price
C. quantity; quality
D. income; price
26. The substitution bias in the CPI refers to the failure of statisticians to:
A. allow for the possibility that consumers switch from products whose prices are rising.
B. allow for the possibility that consumers switch stores at which they shop.
C. take into account improvements in goods and services.
D. take into account new products purchased by consumers.
27. When consumers substitute a cheaper good for a more expensive one, the CPI will ______ change in the cost of living.
A. equal the
B. understate the
C. precisely measure the
D. overstate the
28. Suppose the value of the CPI is 1.10 in year 1, 1.16 in year 2, and 1.27 in year 3. Assume also that the price of computers increases by 3% between year 1 and year 2, and by another 3% between year 2 and year 3. The price level is increasing, the inflation rate is _______, and the relative price of computers is _________.
A. increasing; increasing
B. constant; increasing
C. constant; decreasing
D. increasing; decreasing
29. The shoe leather costs of inflation include all of the following EXCEPT:
A. the lost purchasing power of cash.
B. the extra costs incurred to avoid holding cash.
C. the cost of more frequent trips to the bank.
D. the installation of a new cash management system.
30. If the CPI in 1998 equaled 0.15 while the CPI in 1999 equaled 0.14. The rate of inflation between 1998 and 1999 was ____ percent.
A. -7.1
B. 6.6
C. 1.4
D. -6.6