Measuring the Cost of Living 201
11. The Bureau of Labor Statistics determines which prices are most important to the typical
consumer by surveying consumers.
a. True
b. False
12. The content of the basket of goods and services used to compute the CPI changes every month.
a. True
b. False
13. By keeping the basket of goods and services the same when computing the CPI, the Bureau of
Labor Statistics isolates the effects of price changes from the effect of any quantity changes that
might be occurring at the same time.
a. True
b. False
202 Measuring the Cost of Living
14. When the consumer price index is computed, the base year is always the first year among the
years being considered.
a. True
b. False
15. The CPI for 2008 is computed by dividing the price of the basket of goods and services in 2008
by the price of the basket of goods and services in the base year, then multiplying by 100.
a. True
b. False
16. The CPI is always 1 in the base year.
a. True
b. False
Measuring the Cost of Living 203
17. If the current year CPI is 140, then the price level has increased 40 percent since the base year.
a. True
b. False
18. If the current year CPI is 90, then the price level has decreased 10 percent since the base year.
a. True
b. False
19. The inflation rate for 2007 is computed by dividing (the CPI in 2007 minus the CPI in 2006) by the
CPI in 2006, then multiplying by 100.
a. True
b. False
204 Measuring the Cost of Living
20. If the value of the consumer price index is 110 in 2005 and 121 in 2006, then the inflation rate is
11 percent for 2006.
a. True
b. False
21. The producer price index measures the cost of a basket of goods and services bought by firms
rather than consumers.
a. True
b. False
22. Changes in the consumer price index are useful in predicting changes in the producer price index.
a. True
b. False
Measuring the Cost of Living 205
23. Data from the Bureau of Labor Statistics show that the largest category of consumer spending is
housing.
a. True
b. False
24. Data from the Bureau of Labor Statistics show that consumer spending on transportation is only
slightly higher than consumer spending on food and beverages.
a. True
b. False
25. Data from the Bureau of Labor Statistics show that consumer spending on medical care is about
equal to consumer spending on recreation and consumer spending on education and
communication.
a. True
b. False
206 Measuring the Cost of Living
26. Data from the Bureau of Labor Statistics show that apparel makes up 14 percent of the typical
consumer’s budget.
a. True
b. False
27. The goal of the consumer price index is to gauge how much incomes must rise to maintain a
constant standard of living.
a. True
b. False
28. Substitution bias occurs because the CPI ignores the possibility of consumer substitution toward
goods that have become relatively less expensive.
a. True
b. False
Measuring the Cost of Living 207
29. Substitution bias causes the CPI to understate the increase in the cost of living from one year to
the next.
a. True
b. False
30. When a new good is introduced, consumers have more variety from which to choose, and this in
turn increases the cost of maintaining the same level of economic well–being.
a. True
b. False
31. The CPI does not reflect the increase in the value of the dollar that arises from the introduction of
new goods.
a. True
b. False
208 Measuring the Cost of Living
32. If the quality of a good deteriorates from one year to the next while its price remains the same,
then the value of a dollar falls.
a. True
b. False
33. The Bureau of Labor Statistics does not try to account for quality changes in the goods and
services in the basket used to compute the CPI.
a. True
b. False
34. There is no longer much debate among economists concerning the severity of and the solution to
the problems in using the CPI to measure the cost of living.
a. True
b. False
Measuring the Cost of Living 209
35. Many economists believe the bias in the CPI is now only about half as large as it once was.
a. True
b. False
36. The CPI and GDP deflator usually tell two different stories about how quickly prices are rising.
a. True
b. False
37. When the price of Italian wine rises, this change is reflected in the U.S. CPI but not in the U.S.
GDP deflator.
a. True
b. False
210 Measuring the Cost of Living
38. When the price of nuclear missiles rises, this change is reflected in the CPI but not in the GDP
deflator.
a. True
b. False
39. In the U.S., when the price of oil rises, the CPI rises by much more than does the GDP deflator.
a. True
b. False
40. The group of goods and services used to compute the GDP deflator changes automatically over
time, but the group of goods and services used to compute the CPI does not.
a. True
b. False
Measuring the Cost of Living 211
41. The largest sector in the consumer price index market basket is food and beverage purchases.
a. True
b. False
42. The Bureau of Labor Statistics surveys consumers to determine a fixed basket of goods.
a. True
b. False
43. If the consumer price index is 120 in 2009 and 139.2 in 2010, then the rate of inflation for 2010 is
39.2 percent.
a. True
b. False
212 Measuring the Cost of Living
44. The GDP deflator reflects the prices of all goods and services produced around the world,
whereas the consumer price index reflects the prices of all goods and services bought by
consumers.
a. True
b. False
45. Consumer price index = × 100.
a. True
b. False
46. Consumer price index = × 100.
a. True
b. False
Measuring the Cost of Living 213
47. When consumer spending is broken down into the major categories of goods and services, the
largest single category is spending on transportation.
a. True
b. False
48. The purpose of measuring the overall level of prices in the economy is to permit comparison
between dollar figures from different times.
a. True
b. False
49. A dollar figure from 1908 is converted into 2008 dollars by dividing the 2008 price level by the
1908 price level, then multiplying by the 1908 dollar figure.
a. True
b. False
214 Measuring the Cost of Living
50. If the CPI today is 120 and the CPI five years ago was 80, then something that cost $1 five years
ago would cost $1.50 in today’s prices.
a. True
b. False
51. Henry Ford paid his workers $5 a day in 1914, when the CPI was 10. Today, with the price index
at 177, the $5 a day is worth $88.50.
a. True
b. False
52. If you currently make $25,000 a year and the CPI rises from 110 today to 150 in five years, then
you need to be making $43,333.33 in five years to have kept pace with consumer price inflation.
a. True
b. False
Measuring the Cost of Living 215
53. When some dollar amount is automatically corrected for inflation by law or contract, the amount is
said to be indexed for inflation.
a. True
b. False
54. A COLA automatically raises the wage when the CPI rises.
a. True
b. False
55. The U.S. income tax system is completely indexed for inflation.
a. True
b. False
216 Measuring the Cost of Living
56. Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later,
Bob withdraws his $105. If inflation was 2 percent during the year the money was deposited, then
Bob’s purchasing power has increased by 3 percent.
a. True
b. False
57. Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later,
Bob withdraws his $105. If inflation was 5 percent during the year the money was deposited, then
Bob’s purchasing power has not changed.
a. True
b. False
58. Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later,
Bob withdraws his $105. If inflation was 7 percent during the year the money was deposited, then
Bob’s purchasing power has increased by 2 percent.
a. True
b. False
Measuring the Cost of Living 217
59. Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later,
Bob withdraws his $105. If deflation was 5 percent during the year the money was deposited,
then Bob’s purchasing power has not changed.
a. True
b. False
60. Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later,
Bob withdraws his $105. If deflation was 7 percent during the year the money was deposited,
then Bob’s purchasing power has increased by 12 percent.
a. True
b. False
61. The real interest rate measures the change in dollar amounts.
a. True
b. False
218 Measuring the Cost of Living
62. The real interest rate is the interest rate corrected for inflation.
a. True
b. False
63. The nominal interest rate tells you how fast the number of dollars in your bank account rises over
time.
a. True
b. False
64. The real interest rate tells you how fast the purchasing power of your bank account rises over
time.
a. True
b. False
Measuring the Cost of Living 219
65. If the nominal interest rates rises, then the inflation rate must have increased.
a. True
b. False
66. If the nominal interest rate is 5 percent and the inflation rate is 2 percent, then the real interest
rate is 7 percent.
a. True
b. False
67. If the nominal interest rate is 5 percent and the real interest rate is 2 percent, then the inflation
rate is 3 percent.
a. True
b. False
220 Measuring the Cost of Living
68. If the real interest rate is 5 percent and the inflation rate is 2 percent, then the nominal interest
rate is 7 percent.
a. True
b. False
69. The value of the consumer price index increased from 140 to 147 during 2006. Nathan opened a
bank account at the beginning of 2006, and at the end of 2006 his account balance was $12,840.
The purchasing power of Nathan’s account increased by 2 percent during the year. We can
conclude that Nathan opened his account with a deposit of $11,500 at the beginning of 2006.
a. True
b. False
70. The U.S. economy has never experienced deflation.
a. True
b. False