140. The relative importance of housing in the breakdown of consumer spending is
a.
42 percent.
b.
15 percent.
c.
6 percent.
d.
4 percent.
141. The second largest category, by relative importance, in the CPI calculation is
a.
housing.
b.
apparel.
c.
transportation.
d.
medical care.
142. For purposes of calculating the CPI, the housing category of consumer spending includes the cost of
a.
b.
c.
d.
143. 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.
144. 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.
145. 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.
146. 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.
147. 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
148. 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
149. 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
150. 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.
151. 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.
152. 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.
4.2 percent.
d.
10 percent.
153. If the cost of transportation increases by 20 percent, then, other things the same, the CPI is likely to increase by about
a.
0.3 percent.
b.
1.6 percent.
c.
3.2 percent.
d.
10 percent.
154. If the cost of food & beverages increases by 10 percent, then, other things the same, the CPI is likely to increase by
about
a.
1.5 percent.
b.
7.5 percent.
c.
10 percent.
d.
20 percent.
155. If the cost of medical care increases by 40 percent, then, other things the same, the CPI is likely to increase by about
a.
0.9 percent.
b.
3.2 percent.
c.
8.0 percent.
d.
40 percent.
156. If the cost of apparel increases by 50 percent, then, other things the same, the CPI is likely to increase by about
a.
0.5 percent.
b.
1.5 percent.
c.
3.0 percent.
d.
11.8 percent.
157. 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.
158. 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.
159. The consumer price index tires to measure how much consumer incomes must rise in order to maintain a constant
a.
level of real GDP.
b.
ratio of consumption to GDP.
c.
ratio of net exports to GDP.
d.
standard of living.
160. 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.
161. 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
162. 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.
163. 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.
164. 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.
165. Suppose the price of a quart of milk rises from $1.00 to $1.20 and the price of a T-shirt rises from $8.00 to $9.60. If
the CPI rises from 150 to 195, 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.
166. 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 177, 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.
167. Suppose the price of a six-pack of cola rises from $3 to $3.75 and the price of a pack of mints rises from $1.25 to
$1.75. If the CPI rises from 140 to 182, then people likely will buy
a.
more cola and more mints.
b.
more cola and fewer mints.
c.
less cola and more mints.
d.
less cola and fewer mints.
168. Suppose the price for one gallon of gasoline rises from $3.50 to $4.00 and the price of one gallon of milk rises from
$3.00 to $3.20. If the CPI rises from 120 to 132, then people likely will buy
a.
more gasoline and more milk.
b.
more gasoline and fewer milk.
c.
less gasoline and more milk.
d.
less gasoline and fewer milk.
169. 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.
170. 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.
171. 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
172. 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
173. Assume that consumers consider rice and potatoes to be substitutes, so that when the price of rice rises, consumers
purchase less rice and more potatoes. When the CPI is computed following the increase in the price of rice, it takes into
account
a.
the increase in the price of rice.
b.
the decrease in the quantity of rice purchased and the increase in the quantity of potatoes purchased.
c.
Both (a) and (b) are correct.
d.
None of the above is correct.
174. 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.
175. Suppose prices of personal computers fall significantly and consumers respond by buying more personal computers.
The consumer price index
a.
reflects this price decrease accurately.
b.
understates this price decrease due to the substitution bias.
c.
overstates this price decrease due to the income bias.
d.
overstates this price decrease due to the substitution bias.
176. 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.
177. 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.
178. 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.
179. 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.
180. 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
181. 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
182. 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.
183. 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.
184. 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.
185. 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.
186. 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.
187. Suppose lawn mowers are part of the market basket used to compute the CPI. Suppose also that the quality of lawn
mowers deteriorates 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.