188. 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
189. Michelle bought word-processing software in 2009 for $75. Michelle’s cousin, Barry, bought an upgrade of the same
software in 2010 for $75. 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
190. 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
changes, 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 changes,
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.
191. 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.
b.
c.
d.
192. 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.
193. 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.
194. 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
195. 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.
196. 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.
197. 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.
198. 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.
199. 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.
200. 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.
201. 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.
202. 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.
203. 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.
204. 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.
205. 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.
206. 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.
207. A Korean steel company produces steel in the United States, with some of its steel being exported to other nations
and some of it being sold within the United States. If the prices of this steel 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.
208. 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.
209. 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.
210. 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.
211. Assume most athletic apparel bought by U.S. consumers is imported from other nations. If all else is constant, an
increase in the price of foreign-made athletic apparel will cause the U.S.
a.
consumer price index and GDP deflator to increase by exactly the same amount.
b.
GDP deflator to increase more than the consumer price index.
c.
consumer price index to increase more than the GDP deflator.
d.
GDP deflator to decrease less than the consumer price index.
212. 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.
213. 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.
214. The price of milk increases dramatically, causing a 0.5 percent increase in the CPI. The price increase will most
likely cause the GDP deflator to increase by
a.
more than 0.5 percent.
b.
less than 0.5 percent.
c.
0.5 percent.
d.
None of the above is correct; this particular price increase will not affect the GDP deflator.
215. 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.
216. 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.
217. 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.
218. 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.
219. 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.
220. 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.
221. An increase in the price of Irish whiskey imported into the United States 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.
222. 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.
223. 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.
224. 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.
225. 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.
226. 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.
227. In addition to the consumer price index, the Bureau of Labor Statistics also calculates the
a.
macroeconomic price index.
b.
producer price index.
c.
rental unit price index.
d.
terms of trade.
228. Price changes from year to year are not proportional, and consumers respond to these changes by altering their
spending patterns. The problem this creates for inflation calculations is called
a.
deflation.
b.
inflation.
c.
unmeasured quality change.
d.
substitution bias.
229. One of the differences between the GDP deflator and the consumer price index is
a.
the GDP deflator includes income earned by American citizens working in foreign countries and the consumer
price index is based solely on purchases made in the U.S.
b.
the consumer price index basket of goods is updated constantly by the Bureau of Labor Statistics whereas the
GDP deflator is updated only occasionally.
c.
the consumer price index includes items not included in the GDP deflator such as airplanes purchased by the
Air Force.
d.
the GDP deflator reflects prices for all goods and services produced domestically and the consumer price
index reflects prices for some goods and services bought by consumers.
230. 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
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.
231. Which of the following statements is correct?