Measuring the Cost of Living
Multiple Choice – Section 00: Introduction
1. Babe Ruth, the famous baseball player, earned $80,000 in 1931. Today, the best baseball players
can earn more than 400 times as much as Babe Ruth earned in 1931. However, prices have also
risen since 1931. We can conclude that
a. the best baseball players today are about 400 times better off than Babe Ruth was in 1931.
b. because prices have also risen, the standard of living of baseball stars hasn‘t changed since
1931.
c. one cannot make judgments about changes in the standard of living based on changes in prices
and changes in incomes.
d. one cannot determine whether baseball stars today enjoy a higher standard of living than Babe
Ruth did in 1931 without additional information regarding increases in prices since 1931.
2. The consumer price index is used to
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.
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3. The consumer price index is used to
a. convert nominal GDP into real GDP.
b. turn dollar figures into meaningful measures of purchasing power.
c. characterize the types of goods and services that consumers purchase.
d. measure the quantity of goods and services that the economy produces.
4. Which of the following is not correct?
a. The consumer price index gives economists a way of turning dollar figures into meaningful
measures of purchasing power.
b. The consumer price index is used to monitor changes in the cost of living over time.
c. The consumer price index is used by economists to measure the inflation rate.
d. The consumer price index is used to measure the quantity of goods and services that the
economy is producing.
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5. When the consumer price index rises, the typical family
a. has to spend more dollars to maintain the same standard of living.
b. can spend fewer dollars to maintain the same standard of living.
c. finds that its standard of living is not affected.
d. can offset the effects of rising prices by saving more.
6. When the consumer price index falls, the typical family
a. has to spend more dollars to maintain the same standard of living.
b. can spend fewer dollars to maintain the same standard of living.
c. finds that its standard of living is not affected.
d. can save less because they do not need to offset the effects of rising prices.
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7. Economists use the term inflation to describe a situation in which
a. some prices are rising faster than others.
b. the economy‘s overall price level is rising.
c. the economy’s overall price level is high, but not necessarily rising.
d. the economy’s overall output of goods and services is rising faster than the economy’s overall
price level.
8. The term inflation is used to describe a situation in which
a. the overall level of prices in the economy is increasing.
b. incomes in the economy are increasing.
c. stock-market prices are rising.
d. the economy is growing rapidly.
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9. When the overall level of prices in the economy is increasing, economists say that the economy is
experiencing
a. economic growth.
b. stagflation.
c. inflation.
d. deflation.
10. The inflation rate is defined as the
a. price level in an economy.
b. change in the price level from one period to the next.
c. percentage change in the price level from the previous period.
d. price level minus the price level from the previous period.
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11. The economy’s inflation rate is the
a. price level in the current period.
b. change in the price level from the previous period.
c. change in the gross domestic product from the previous period.
d. percentage change in the price level from the previous period.
12. The inflation rate you are likely to hear on the nightly news is calculated from
a. the GDP deflator.
b. the CPI.
c. the Dow Jones Industrial Average.
d. the unemployment rate.
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13. Which of the following is correct?
a. The GDP deflator is better than the CPI at reflecting the goods and services bought by
consumers.
b. The CPI is better than the GDP deflator at reflecting the goods and services bought by
consumers.
c. The GDP deflator and the CPI are equally good at reflecting the goods and services bought by
consumers.
d. The GDP deflator is more commonly used as a gauge of inflation than the CPI is.
14. The CPI is more commonly used as a gauge of inflation than the GDP deflator is because
a. the CPI is easier to measure.
b. the CPI is calculated more often than the GDP deflator is.
c. the CPI better reflects the goods and services bought by consumers.
d. the GDP deflator cannot be used to gauge inflation.
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15. Which of the following statements is correct?
a. The CPI can be used to compare dollar figures from different points in time.
b. The percentage change in the CPI is a measure of the inflation rate, but the percentage change
in the GDP deflator is not a measure of the inflation rate.
c. Compared to the consumer price index (CPI), the GDP deflator is the more common gauge of
inflation.
d. The GDP deflator better reflects the goods and services bought by consumers than does the
CPI.
Multiple Choice – Section 01A: The Consumer Price Index
1. The CPI is a measure of the overall cost of
a. the inputs purchased by a typical producer.
b. the goods and services purchased by a typical consumer.
c. the goods and services produced in the economy.
d. the stocks on the New York Stock Exchange.
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2. The CPI is a measure of the overall cost of the goods and services bought by
a. a typical firm.
b. the government.
c. a typical consumer.
d. All of the above are correct.
3. The CPI is a measure of the overall cost of the goods and services bought by
a. a typical consumer, and the CPI is computed and reported by the Department of the Treasury.
b. typical consumers and typical business firms, and the CPI is computed and reported by the
Department of the Treasury.
c. a typical consumer, and the CPI is computed and reported by the Bureau of Labor Statistics.
d. typical consumers and typical business firms, and the CPI is computed and reported by the
Bureau of Labor Statistics.
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4. Which of the following agencies calculates the CPI?
a. the National Price Board
b. the Department Of Weight and Measurements
c. the Bureau of Labor Statistics
d. the Congressional Budget Office
5. Which entity within the U.S. government is responsible for computing and reporting the CPI?
a. the Department of Commerce
b. the Department of Labor
c. the General Accounting Office
d. the Council of Economic Advisers
6. The CPI is calculated
a. monthly by the Department of Commerce.
b. monthly by the Bureau of Labor Statistics.
c. quarterly by the Department of Commerce.
d. quarterly by the Bureau of Labor Statistics.
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7. Which of the following agencies calculates the CPI?
a. Bureau of Labor Statistics
b. Congressional Budget Office
c. Federal Reserve
d. Bureau of National Price Standards and Records
8. Reports on the current consumer price index are released every
a. quarter.
b. two weeks.
c. month.
d. week.
9. The CPI is calculated
a. weekly.
b. monthly.
c. quarterly.
d. yearly.
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10. The steps involved in calculating the consumer price index and the inflation rate, in order, are as
follows:
a. Choose a base year, update the basket, find the prices, estimate the basket’s cost, compute the
index, and compute the inflation rate.
b. Choose a base year, fix the basket, find the prices, compute the inflation rate, compute the
basket‘s cost, and compute the index.
c. Fix the basket, find the prices, compute the basket’s cost, choose a base year and compute the
index, and compute the inflation rate.
d. Fix the basket, find the prices, compute the inflation rate, compute the basket’s cost, and
choose a base year and compute the index.
11. In the CPI, goods and services are weighted according to
a. how long a market has existed for each good or service.
b. the extent to which each good or service is regarded by the government as a necessity.
c. how much consumers buy of each good or service.
d. the number of firms that produce and sell each good or service.
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12. In the calculation of the CPI, books are given greater weight than magazines if
a. consumers buy more books than magazines.
b. the price of books is higher than the price of magazines.
c. it costs more to produce books than it costs to produce magazines.
d. books are more readily available than magazines to the typical consumer.
13. In the calculation of the CPI, tea is given greater weight than beer if
a. the price of tea is higher than the price of beer.
b. it costs more to produce tea than it costs to produce beer.
c. tea is more readily available than beer to the typical consumer.
d. consumers buy more tea than beer.
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14. In calculating the CPI, a fixed basket of goods and services is used. The quantities of the goods
and services in the fixed basket are determined by
a. surveying consumers.
b. surveying sellers of the goods and services.
c. working backward from the rate of inflation to arrive at imputed values for those quantities.
d. arbitrary choices made by federal government employees.
15. What basket of goods and services is used to construct the CPI?
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 expenditures
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16. 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 nor the number of pears bought by the typical consumer changes
from year to year.
c. the percentage change in the price of apples is equal to the percentage change in the price of
pears from year to year.
d. neither the price of apples nor the price of pears changes from year to year.
17. Consider a small economy in which consumers buy only two goods: pretzels and cookies. In order
to compute the consumer price index for this economy for two or more consecutive years, we
assume that
a. the percentage change in the price of pretzels is equal to the percentage change in the price of
cookies from year to year.
b. the number of pretzels bought by the typical consumer is equal to the number of cookies bought
by the typical consumer in each year.
c. neither the number of pretzels nor the number of cookies bought by the typical consumer
changes from year to year.
d. neither the price of pretzels nor the price of cookies changes from year to year.
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18. To calculate the CPI, the Bureau of Labor Statistics uses
a. the prices of all goods and services produced domestically.
b. the prices of all final goods and services.
c. the prices of all consumer goods.
d. the prices of some consumer goods.
19. When computing the cost of the basket of goods and services purchased by a typical consumer,
which of the following changes from year to year?
a. the quantities of the goods and services purchased
b. the prices of the goods and services
c. the goods and services making up the basket
d. All of the above are correct.
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20. In computing the consumer price index, a base year is chosen. Which of the following statements
about the base year is correct?
a. The base year is always the first year among the years for which computations are being
made.
b. It is necessary to designate a base year only in the simplest case of two goods; in more realistic
cases, it is not necessary to designate a base year.
c. The value of the consumer price index is always 100 in the base year.
d. The base year is always the year in which the cost of the basket was highest among the years
for which computations are being made.
21. For any given year, the CPI is the price of the basket of goods and services in the
a. given year divided by the price of the basket in the base year, then multiplied by 100.
b. given year divided by the price of the basket in the previous year, then multiplied by 100.
c. base year divided by the price of the basket in the given year, then multiplied by 100.
d. previous year divided by the price of the basket in the given year, then multiplied by 100.
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22. The inflation rate is calculated
a. by determining the change in the price index from the preceding period.
b. by adding up the price increases of all goods and services.
c. by computing a simple average of the price increases for all goods and services.
d. by determining the percentage increase in the price index from the preceding period.
23. The inflation rate is calculated
a. by determining the change in the price index from the preceding period.
b. by determining the change in the price index from the base year.
c. by determining the percentage change in the price index from the preceding period.
d. by determining the percentage change in the price index from the base year.
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24. If 2012 is the base year, then the inflation rate for 2012 equals
a.
b.
c.
d.
25. If 2010 is the base year, then the inflation rate in 2015 equals
a.
b.
c.
d.
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26. Which of the following is the correct formula for calculating the consumer price index?
a.
b.
c.
d.
27. Which of the following is the correct formula for calculating the inflation rate?
a.
b.
c.
d.