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Measuring the Cost of Living 161
63. Refer to Table 24-13. Suppose Olivia’s 2009 clothing expenditure in 2010 dollars amounts to
$1,440. Then X, the consumer price index for 2009, has a value of
a. 120.
b. 130.
c. 140.
d. 150.
64. Suppose the CPI was 56 in 1967, and suppose one must spend $349 today to obtain the same
basket of goods and services that could be bought for $100 in 1967. Then today’s CPI is
a. 223.7.
b. 195.0.
c. 623.2.
d. 195.4.
162 Measuring the Cost of Living
65. Suppose today’s CPI is 134.85, and suppose one must spend $580 today to purchase the same
basket of goods and services that could be bought for $400 in 1989. Then the CPI in 1989 was
a. 24.27.
b. 60.68.
c. 93.00.
d. 195.53.
66. In 1974, one could buy a theater for $1.25. Today the same theater ticket costs $6.50. Which pair
of CPIs would imply that the cost in today's dollars was the same for both tickets?
a. 60 in 1964 and 390 today
b. 75 in 1964 and 390 today
c. 80 in 1964 and 404 today
d. 95 in 1964 and 475 today
Measuring the Cost of Living 163
67. In 1972, one could buy a bag of chips, a pound of hamburger, a package of buns, and a small bag
of charcoal for about $2.50. If the same goods today cost $6.00, then which pair of CPIs would
make the cost in today's dollars the same for both years?
a. 60 in 1972 and 150 today
b. 65 in 1972 and 156 today
c. 75 in 1972 and 160 today
d. 90 in 1972 and 145.8 today
68. In 1972, one could buy model rocket engines for $1.50 each. If those same engines cost $2.50
each today, then which pair of CPIs would make the engine prices in today's dollars the same for
both years?
a. 60 in 1972 and 95 today
b. 60 in 1972 and 120 today
c. 90 in 1972 and 150 today
d. 96 in 1972 and 154 today
164 Measuring the Cost of Living
69. In 1983, one could buy a model radio-controlled airplane for $11.50 each. Those same planes are
available today and the price increased at exactly the rate of inflation. If the CPI today is 220.5
and in 1983 was 105, what is the price of the airplane today?
a. $24.15
b. $11.50
c. $5.48
d. $2.10
70. Wilson is offered a job in Kansas City that pays $50,000 and a job in Dallas that pays $60,000.
Which pair of CPIs would ensure that the two salaries have the same purchasing power?
a. 80 in Kansas City and 100 in Dallas
b. 125 in Kansas City and 150 in Dallas
c. 100 in Kansas City and 124.5 in Dallas
d. 100 in Kansas City and 140 in Dallas
Measuring the Cost of Living 165
71. John just graduated law school and has two competing job offers. The first is in Phoenix and pays
a salary of $150,000. He has a similar job offer in Cleveland that pays $90,000. Which pair of
CPIs would make the two salaries have the same purchasing power?
a. 70 in Phoenix and 42 in Cleveland
b. 68 in Phoenix and 34 in Cleveland
c. 42 in Phoenix and 70 in Cleveland
d. 34 in Phoenix and 68 in Cleveland
72. Elizabeth just received her Ph.D. in economics and has two competing job offers. The first is in
Washington, D.C. and pays a salary of $200,000. She has a similar job offer in Austin, TX that
pays $90,000. Which pair of CPIs would make the two salaries have the same purchasing power?
a. 70 in Washington, D.C. and 42 in Austin, TX
b. 140 in Washington, D.C. and 70 in Austin, TX
c. 160 in Washington, D.C. and 72 in Austin, TX
d. 210 in Washington, D.C. and 150 in Austin, TX
166 Measuring the Cost of Living
73. Pauline is offered a Job in Minneapolis that pays $80,000. She is offered a similar job in Louisville
that pays$71,200. Which pair of CPIs would ensure that the two salaries have the same
purchasing power?
a. 90 in Minneapolis and 83 in Louisville
b. 90 in Minneapolis and 72 in Louisville
c. 100 in Minneapolis and 89 in Louisville
d. 105 in Minneapolis and 90 in Louisville
74. When box office receipts are corrected for inflation, the most popular movie of all time is
a. Star Wars.
b. Titanic.
c. Gone With the Wind.
d. The Sound of Music.
Measuring the Cost of Living 167
75. When box office receipts are not corrected for inflation, the most popular movie of all time is
a. Star Wars.
b. Avatar.
c. Gone With the Wind.
d. The Dark Knight.
76. When box office receipts are not corrected for inflation,
a. The Sound of Music ranks as the most popular movie of all time.
b. Gone with the Wind does not rank as one of the 50 most popular movies of all time.
c. Titanic ranks as the most popular movie of all time.
d. Avatar does not rank as one of the 50 most popular movies of all time.
77. When ranking movies by nominal box office receipts, what important fact is overlooked?
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.
168 Measuring the Cost of Living
78. Indexation refers to
a. a process of adjusting the nominal interest rate so that it is equal to the real interest rate.
b. using a law or contract to automatically correct a dollar amount for the effects of inflation.
c. using a price index to deflate dollar values.
d. an adjustment made by the Bureau of Labor Statistics to the CPI so that the index is in line
with the GDP deflator.
79. A COLA automatically raises the wage when
a. GDP increases.
b. taxes increase.
c. the consumer price index increases.
d. the producer price index increases.
Measuring the Cost of Living 169
80. Consternation Corporation has an agreement with its workers to index completely the wage of its
employees using the CPI. Consternation Corporation currently pays its production line workers
$7.50 an hour and is scheduled to index their wages today. If the CPI is currently 130 and was
125 a year ago, the firm should increase the hourly wages of its workers by
a. $0.04.
b. $0.29.
c. $0.30.
d. $0.50.
81. Consternation Corporation has an agreement with its workers to index completely the wage of its
employees using the CPI. Consternation Corporation currently pays its production line workers
$8.00 an hour and is scheduled to index their wages today. If the CPI is currently 160 and was
128 a year ago, the firm should increase the hourly wages of its workers by
a. $0.25.
b. $1.60.
c. $2.00.
d. $2.56.
170 Measuring the Cost of Living
82. Social Security payments are indexed for inflation using the CPI. A recent newspaper editorial
claimed that Social Security recipients are harmed by years of low inflation because they do not
receive as large an increase in their payments as they do in years of high inflation. Which of the
following statements is correct?
a. The newspaper editorial is correct under all circumstances.
b. The newspaper editorial is correct if the market basket consumed by Social Security recipients
is the same as the market basket used to compute the CPI.
c. The newspaper editorial could be correct if the prices of the goods consumed by Social
Security recipients change at a different rate than the prices of the goods in the market basket
used to compute the CPI
d. The newspaper editorial is incorrect under all circumstances.
83. Of Social Security benefits and federal income tax brackets, which is indexed?
a. Both are indexed.
b. Only Social Security benefits are indexed.
c. Only federal income tax brackets are indexed.
d. Neither is indexed.
Measuring the Cost of Living 171
84. Nate collected Social Security payments of $220 a month in 1985. If the price index rose from 90
to 108 between 1985 and 1986, then his Social Security payments for 1986 should have been
a. $228.
b. $238.
c. $257.
d. $264.
85. Marion collected Social Security payments of $250 a month in 1985. If the price index rose from
90 to 108 between 1985 and 1986, then her Social Security payments for 1986 should have been
a. $268.
b. $292.
c. $300.
d. $358.
86. Social Security payments are indexed for inflation using
a. the CPI.
b. the PPI.
c. the GDP deflator.
d. real interest rates.
172 Measuring the Cost of Living
87. Which of the following statements is correct about the relationship between inflation and interest
rates?
a. There is no relationship between inflation and interest rates.
b. The interest rate is determined by the rate of inflation.
c. In order to fully understand inflation, we need to know how to correct for the effects of
interest rates.
d. In order to fully understand interest rates, we need to know how to correct for the effects of
inflation.
88. Which of the following is not correct?
a. If the inflation rate exceeds the nominal interest rate, then the purchasing power of an interest-
earning deposit falls over time.
b. If there is deflation, then the purchasing power of an interest-earning deposit rises by more than
the nominal interest rate over time.
c. The higher the rate of inflation, the smaller the increase in the purchasing power of an interest-
earning deposit.
d. The purchasing power of an interest-earning deposit can increase or decrease over time, but it
cannot stay the same.
Measuring the Cost of Living 173
89. Which of the following statements is correct about the relationship between the nominal interest
rate and the real interest rate?
a. The real interest rate is the nominal interest rate times the rate of inflation.
b. The real interest rate is the nominal interest rate minus the rate of inflation.
c. The real interest rate is the nominal interest rate plus the rate of inflation.
d. The real interest rate is the nominal interest rate divided by the rate of inflation.
90. The nominal interest rate tells you
a. how fast the number of dollars in your bank account rises over time.
b. how fast the purchasing power of your bank account rises over time.
c. the number of dollars in your bank account today.
d. the purchasing power of your bank account today.
174 Measuring the Cost of Living
91. The real interest rate tells you
a. how fast the number of dollars in your bank account rises over time.
b. how fast the purchasing power of your bank account rises over time.
c. the number of dollars in your bank account today.
d. the purchasing power of your bank account today.
92. Which of the following statements about real and nominal interest rates is correct?
a. Real interest rates can be either positive or negative, but nominal interest rates must be positive.
b. Real interest rates and nominal interest rates must be positive.
c. Real interest rates must be positive, but nominal interest rates can be either positive or negative.
d. Real interest rates and nominal interest rates can be either positive or negative.
Measuring the Cost of Living 175
93. Which of the following statements about real and nominal interest rates is correct?
a. When the nominal interest rate is rising, the real interest rate is necessarily rising; when the
nominal interest rate is falling, the real interest rate is necessarily falling.
b. If the nominal interest rate is 4 percent and the inflation rate is 3 percent, then the real interest
rate is 7 percent.
c. An increase in the real interest rate is necessarily accompanied by either an increase in the
nominal interest rate, an increase in the inflation rate, or both.
d. When the inflation rate is positive, the nominal interest rate is necessarily greater than the real
interest rate.
94. As long as prices are rising over time, then
a. the nominal interest rate exceeds the real interest rate.
b. the real interest rate exceeds the nominal interest rate.
c. the real interest rate is positive.
d. the nominal interest rate is a better indicator than the real interest rate of how fast the
purchasing power of your bank account is changing over time.
176 Measuring the Cost of Living
95. If the nominal interest rate is 8 percent and the rate of inflation is 3 percent, then the real interest
rate is
a. -5 percent.
b. 1.67 percent.
c. 5 percent.
d. 11 percent.
96. If the nominal interest rate is 6 percent and the rate of inflation is 2 percent, then the real interest
rate is
a. -4 percent.
b. 3 percent.
c. 4 percent.
d. 8 percent.
Measuring the Cost of Living 177
97. If the nominal interest rate is 6 percent and the rate of inflation is 10 percent, then the real
interest rate is
a. -16 percent.
b. -4 percent.
c. 4 percent.
d. 16 percent.
98. If the nominal interest rate is 5 percent and the rate of inflation is 9 percent, then the real interest
rate is
a. -4 percent.
b. -0.44 percent.
c. 4 percent.
d. 14 percent.
178 Measuring the Cost of Living
99. If the nominal interest rate is 4.2 percent and the rate of inflation is -0.5 percent, then the real
interest rate is
a. -8.4 percent.
b. -2.1 percent.
c. 3.7 percent.
d. 4.7 percent.
100. If the nominal interest rate is 5 percent and the rate of inflation is -2.5 percent, then the real
interest rate is
a. -7.5 percent.
b. -2.5 percent.
c. 2.5 percent.
d. 7.5 percent.
Measuring the Cost of Living 179
101. If the nominal interest rate is 8 percent and the real interest rate is 5.5 percent, then the inflation
rate is
a. -2.5 percent.
b. 0.45 percent.
c. 2.5 percent.
d. 13.5 percent.
102. If the nominal interest rate is 9 percent and the real interest rate is 3 percent, then the inflation
rate is
a. -6 percent.
b. 3 percent.
c. 6 percent.
d. 12 percent.
180 Measuring the Cost of Living
103. If the nominal interest rate is 7 percent and the real interest rate is -2.5 percent, then the inflation
rate is
a. -9.5 percent.
b. -4.5 percent.
c. 4.5 percent.
d. 9.5 percent.
104. If the nominal interest rate is 4 percent and the real interest rate is -2.5 percent, then the inflation
rate is
a. -6.5 percent.
b. -1.5 percent.
c. 1.5 percent.
d. 6.5 percent.
