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Measuring the Cost of Living 81
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
Measuring the Cost of Living 83
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.
Measuring the Cost of Living 91
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.
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.
substitution bias and introduction of new goods
b.
introduction of new goods and unmeasured quality change
c.
substitution bias and unmeasured quality change
d.
income bias and substitution bias
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.
