Measuring the Cost of Living 121
10.
Which of the following statements is true?
a.
Even if we know the values of the consumer price index for the years 2009 and 2010, we
cannot calculate the
inflation rate for 2010 if we do not know which year is the base year.
b.
If we know the base year is 1990, and if we know the value of the consumer price index for
the year 2010,
then we have all the information we need to calculate the inflation rate for 2010.
c.
If we know the base year is 2000, and if we know the value of the consumer price index for
the year 1995,
then we have all the information we need to calculate the inflation rate for 1995.
d.
If we know the base year is 2000, and if we know the value of the consumer price index for
the year 1995,
then we have all the information we need to calculate the percentage change in
the cost of living between
1995 and 2000.
11.
Changes in the quality of a good
a.
do not present a problem in the construction of the consumer price index.
b.
present a problem in the construction of the consumer price index, and that problem is
sometimes referred to
as substitution bias.
c.
are not accounted for, as a matter of policy, by the Bureau of Labor Statistics.
d.
can lead to either an increase or a decrease in the value of a dollar.
12.
The introduction of the video cassette recorder in the 1970s exemplified a problem in measuring
the cost of living;
that problem is the problem of
a.
substitution bias.
b.
product-improvement bias.
c.
introduction of new goods.
d.
unmeasured quality change.
13.
An increase in the price of imported coffee shows up
a.
in the consumer price index and in the GDP deflator.
b.
in the consumer price index, but not in the GDP deflator.
c.
in the GDP deflator, but not in the consumer price index.
d.
in neither the consumer price index nor in the GDP deflator.
14.
Every unit of good x that is produced in the United States is exported to other countries. An
increase in the price of
good x shows up
a.
in the consumer price index and in the GDP deflator.
b.
in the consumer price index, but not in the GDP deflator.
c.
in the GDP deflator, but not in the consumer price index.
d.
in neither the consumer price index nor in the GDP deflator.
15.
In which of the following cases would there be an effect on the value of the U.S. consumer price
index, but not on
the value of the U.S. GDP deflator?
a.
All of the truck tires that are produced by a certain company in South Korea are sold to the
U.S. military, and
the price of these tires decreases.
b.
All of the truck tires that are produced by a certain company in California are sold to the U.S.
military, and the
price of these tires decreases.
c.
Most of the bananas that are produced by a certain company in Honduras end up in U.S.
grocery stores, and
the price of these bananas increases.
d.
Most of the earth-moving machines that are produced by a certain company in Illinois are
exported to other
countries, and the price of these machines increases.
16.
Suppose the typical consumer buys more bananas than oranges. In fixing the basket of goods and
services for the
purpose of calculating the consumer price index, the Bureau of Labor Statistics
a.
ignores the fact that the typical consumer buys more bananas than orange; this procedure does
not affect the
value of the index.
b.
ignores the fact that the typical consumer buys more bananas than orange; this procedure
results in a
potentially-serious bias in the index.
c.
places more weight on the price of bananas than on the price of oranges; the weights of the
two prices are
determined by surveying consumers.
d.
places more weight on the price of bananas than on the price of oranges; the weights of the
two prices are
determined by the extent to which those prices have changed over the previous
year.
17.
For the purpose of calculating the consumer price index, the basket of goods
a.
is kept the same from year to year so that the effects of price changes are isolated from the
effect of any
quantity changes that might be occurring at the same time.
b.
is kept the same from year to year; otherwise, the value of the index would remain constant
from year to
year.
c.
varies from year to year; otherwise, the value of the index would remain constant from year to
year.
d.
varies from year to year so that consumers’ buying patterns are updated in a timely fashion.
18.
Which of the following statements is correct?
a.
In order to calculate the inflation rate for the year 2011, we need to know the values of the
consumer price
index for the years 2009, 2010, and 2011.
b.
Changes in the consumer price index are often thought to be useful in predicting changes in the
producer price
index.
c.
Despite its name, the “consumer price index” really measures the overall cost of the goods and
services bought by consumers, business firms, and units of government.
d.
If the prices of all goods and services changed proportionately over time, then the consumer
price index would
reflect no substitution bias.
19.
With respect to the consumer price index, the substitution bias arises because
a.
prices of goods and services do not change in the same proportion from year to year.
b.
consumers are slow to adjust their buying patterns from year to year in response to price
changes.
c.
consumers are eager to buy new products as they are introduced, despite their lack of full
information about
the quality of those products until they buy and use them.
d.
All of the above are correct.
20.
With respect to the consumer price index, which of the following serves as an example of how the
substitution bias
arises? Between 2010 and 2011, the price of a pound of peanuts
a.
rises from $0.80 to $1.00 while the price of a loaf of bread rises from $2.00 to $2.50.
b.
falls from $0.90 to $0.72 while the price of a loaf of bread falls from $2.00 to $1.60.
c.
remains constant, as does the price of a loaf of bread.
d.
None of the above serves as an example of how the substitution bias arises.
21.
With respect to the consumer price index, which of the following does not serve as an example of
how the
substitution bias arises? Between 2010 and 2011, the price of a pound of peanuts
a.
rises from $0.80 to $1.00 while the price of a loaf of bread rises from $2.00 to $2.50.
b.
rises from $1.00 to $1.30 while the price of a loaf of bread rises from $2.00 to $2.30.
c.
remains constant, while the price of a loaf of bread rises from $2.00 to $2.30.
d.
falls from $1.00 to $0.80 while the price of a loaf of bread falls from $2.00 to $1.80.
22.
The consumer price index is subject to substitution bias because
a.
some pairs of goods are complements rather than substitutes.
b.
some goods are inferior rather than normal.
c.
the law of demand applies to most, if not all, goods.
d.
the index does not take into account the likelihood that consumers substitute newly-introduced
goods for more-
established goods.
23.
Suppose the quality of beef changes over time, but the quality change goes unmeasured for the
purpose of computing
the consumer price index. In which of the following instances would the
bias resulting from the unmeasured quality
change be least severe?
a.
The quality of beef deteriorates and beef becomes more expensive relative to other goods.
b.
The quality of beef deteriorates and beef becomes less expensive relative to other goods.
c.
The quality of beef improves and beef becomes more expensive relative to other goods.
d.
The quality of beef improves and the price of beef relative to other prices remains unchanged.
24.
Suppose the quality of televisions changes over time, but the quality change goes unmeasured for
the purpose of
computing the consumer price index. In which of the following instances would the
bias resulting from the
unmeasured quality change be most severe?
a.
The quality of televisions deteriorates and televisions become more expensive relative to other
goods.
b.
The quality of televisions improves and televisions become less expensive relative to other
goods.
c.
The quality of televisions improves and televisions become more expensive relative to other
goods.
d.
The quality of televisions deteriorates and the price of televisions relative to other prices
remains unchanged.
25.
Which of the following pairs of values of the consumer price index (CPI) is consistent with an
inflation rate of 10
percent for 2014?
a. CPI in 2014 = 90; CPI in 2015 = 100
b. CPI in 2014 = 102; CPI in 2015 = 112
c. CPI in 2013 = 210; CPI in 2014 = 220
d. CPI in 2013 = 210; CPI in 2014 = 231
26.
Suppose you know the value of the consumer price index (CPI) in year 2 as well as the inflation
rate in year 2. Which of the following equations is valid for the CPI in year 1?
a.
CPI in year 1 =
b.
CPI in year 1 =
c.
CPI in year 1 =
d.
CPI in year 1 =
27.
Suppose you know the value of the consumer price index (CPI) in year 1 as well as the inflation
rate in year 2.
Which of the following equations is valid for the CPI in year 2?
a.
CPI in year 2 =
b.
CPI in year 2 =
c.
CPI in year 2 =
d.
CPI in year 2 =
130 Measuring the Cost of Living
Multiple Choice – Section 02: Correcting Economic Variables for the Effects of Inflation
1.
The primary purpose of measuring the overall level of prices in the economy is to
a.
allow for the measurement of GDP.
b.
allow consumers to know what kinds of prices to expect in the future.
c.
allow for the comparison of dollar figures from different points in time.
d.
allow for the comparison of dollar figures from the same point in time.
2.
Babe Ruth’s 1931 salary was $80,000. Government statistics show a consumer price index of 15.2
for 1931 and 229.6 for 2012. Ruth’s 1931 salary was equivalent to a 2012 salary of about
a. $5,296.
b.
$1,128,421
c.
$1,208,421
d. $17,152,000
3.
When we express Babe Ruth’s 1931 salary in today’s dollars and compare his salary to those of
current New York
Yankee players, we find that the current median salary of today’s Yankees is
a.
about three quarters of Ruth’s salary.
b.
about the same as Ruth’s salary.
c.
about twice Ruth’s salary.
d.
more than four times Ruth’s salary.
4.
In 1931, President Herbert Hoover was paid a salary of $75,000. Government statistics show a
consumer price
index of 15.2 for 1931 and 229.6 for 2012. President Hoover’s 1931 salary was
equivalent to a 2012 salary of about
a. $4,965.
b. $1,132,895.
c.
$1,057,894.
d. $16,080,001.
5.
In 1931 the price of a movie ticket was $0.25. The consumer price index was 15.2 in 1931, and 210
in 2008. Using
2008 prices, the real price of a movie in 1931 was
a. $13.82.
b. $52.50.
c. $1.81.
d. $3.45.
6.
You know that a candy bar cost five cents in 1962. You also know the CPI for 1962 and the CPI
for today. Which
of the following would you use to compute the price of the candy bar in today’s
prices?
a.
five cents × (1962 CPI / today’s CPI)
b.
five cents × ((today’s CPI – 1962 CPI)/1962 CPI)
c.
five cents × (today’s CPI / 1962 CPI)
d.
five cents × today’s CPI – five cents 1962 CPI.
7.
You know that a candy bar costs sixty cents today. You also know the CPI for 1962 and the CPI
for today. Which
of the following would you use to compute the price of the candy bar in 1962
prices?
a.
sixty cents × (today’s CPI – 1962 CPI)
b.
sixty cents × (1962 CPI – today’s CPI)
c.
sixty cents × (today’s CPI / 1962 CPI)
d.
sixty cents × (1962 CPI / today’s CPI)
8.
If the CPI was 95 in 1955 and is 475 today, then $100 today purchases the same amount of goods
and services as
a.
$4.75 purchased in 1955.
b.
$20.00 purchased in 1955.
c.
$95.00 purchased in 1955.
d.
$500 purchased in 1955.
9.
If the CPI was 90 in 1975 and is 225 today, then $100 today purchases the same amount of
goods and services as
a.
$25.00 purchased in 1975.
b.
$33.33 purchased in 1975.
c.
$40.00 purchased in 1975.
d.
$135.55 purchased in 1975.
10.
If the CPI was 104 in 1967 and is 390 today, then $10 in 1967 purchased the same amount of
goods and services as
a.
$2.67 purchases today.
b.
$37.50 purchases today.
c.
$39.00 purchases today.
d.
$104.00 purchases today.
11.
If the CPI was 108.00 in 1942 and is 336.96 today, then $10 in 1942 purchased the same amount
of goods and
services as
a.
$2.57 purchases today.
b.
$28.89 purchases today.
c.
$31.20 purchases today.
d.
$38.89 purchases today.
12.
The CPI was 96 in 1982, and the CPI was 230 in 2012. How much money would you have
needed in 2012 in order
to buy what you could have bought with $500 in 1982?
a.
$208.96
b.
$1,197.92
c.
$697.92
d. $1,697.92
13.
The CPI was 172 in 2007, and the CPI was 46.5 in 1982. If your parents put aside $1,000 for you
in 1982, then how
much would you have needed in 2007 in order to buy what you could have
bought with the $1,000 in 1982?
a.
$270.35
b.
$1,255.00
c.
$2,698.92
d. $3,698.92
14.
In 1969, Malcolm bought a Pontiac Firebird for $2,500. If the price index was 36.7 in 1969 and
the price index was
235 in 2013, then what is the price of the Firebird in 2013 dollars?
a.
$4,609.57
b.
$4,957.51
c.
$13,508.17
d. $16,008.17
15.
Ethel purchased a bag of groceries in 1970 for $8. She purchased the same bag of groceries in
2006 for $25. If the
price index was 38.8 in 1970 and the price index was 180 in 2006, then what
is the price of the 1970 bag of
groceries in 2006 dollars?
a.
$5.39
b.
$25.00
c.
$29.11
d. $37.11
16.
In 1986, Ken bought a Ford Mustang for $8,000. If the price index was 122 in 1986 and the price
index was 280 in
2011, then what is the price of the Mustang in 2011 dollars?
a.
$3,485.71
b.
$8,100.71
c.
$18,360.66
d. $22,400.00
17.
David earned a salary of $43,500 in 1994 and $89,000 in 2010. The consumer price index was
148.2 in 1994 and 215.3 in 2010. David’s 1994 salary in 2010 dollars is
a. $43,849.05
b.
$61,263.43
c.
$63,195.34
d. $93,655.50
18.
If the CPI was 68 in 1965 and is 285 today, then $100 today purchases the same amount of
goods and services as
a.
$23.86 purchased in 1965.
b.
$32.47 purchased in 1965.
c.
$68.00 purchased in 1965.
d.
$419.12 purchased in 1965.
19.
If the CPI was 127 in 1972 and is 324 today, then $10 in 1972 purchased the same amount of
goods and services as
a.
$3.92 purchases today.
b.
$25.51 purchases today.
c.
$207.00 purchases today.
d.
$324.00 purchases today.
20.
In 1949, Sycamore, Illinois built a hospital for about $500,000. In 1987, the county restored the
courthouse for about $2.4 million. A price index for nonresidential construction was 14 in 1949, 92
in 1987, and 114.5 in 2000. According
to these numbers, the hospital cost about
a.
$3.6 million in 2000 dollars, which is less than the cost of the courthouse restoration in 2000
dollars.
b.
$3.6 million in 2000 dollars, which is more than the cost of the courthouse restoration in 2000
dollars.
c.
$4.1 million in 2000 dollars, which is less than the cost of the courthouse restoration in 2000
dollars.
d.
$4.1 million in 2000 dollars, which is more than the cost of the courthouse restoration in 2000
dollars.
21.
In 1949, Sycamore, Illinois built a hospital for about $500,000. In 1987, the county restored the
courthouse for about $1.7 million. A price index for nonresidential construction was 24 in 1949,
108 in 1987, and 126.5 in 2000. According to these numbers, the hospital cost about
a.
$2.1 million in 2000 dollars, which is less than the cost of the courthouse restoration in 2000
dollars.
b.
$2.1 million in 2000 dollars, which is more than the cost of the courthouse restoration in 2000
dollars.
c.
$2.6 million in 2000 dollars, which is less than the cost of the courthouse restoration in 2000
dollars.
d.
$2.6 million in 2000 dollars, which is more than the cost of the courthouse restoration in 2000
dollars.
Scenario 24-1
The price tag on a tennis ball in 1975 read $0.10, and the price tag on a tennis ball in 2005 read
$1.00. The CPI in
1975 was 52.3, and the CPI in 2005 was 191.3.
22.
Refer to Scenario 24-1. The price of a 1975 tennis ball in 2005 dollars is
a. $0.03.
b. $0.27.
c. $0.37.
d. $1.00.