91. Which of the following is a deficiency of the regular (or traditional) consumer price index (CPI) as a
measure of the cost of living?
a.
The CPI fails to make any adjustment for changes in the price of housing.
b.
The CPI only measures changes in the prices of food, clothing, and energy.
c.
The CPI fails to maintain the quantities of the typical bundle of goods purchased by
consumers constant over a lengthy time frame.
d.
The CPI does not adjust regularly for the fact that consumers will shift their spending
away from goods that become more expensive.
92. The annual rate of inflation is
a.
a change in real income of workers from one year to the next.
b.
the percentage change in the general level of prices from one year to the next.
c.
the increase in the purchasing power of the dollar from one year to the next.
d.
the percentage increase in the total value of the goods and services produced from one
year to the next.
93. Which of the following is true about inflation?
a.
It reduces the cost-of-living of the typical worker.
b.
It is measured by changes in the cost of a typical market basket of goods between time
periods.
c.
It causes the purchasing power of a dollar to rise.
d.
It has no effect on real resources.
94. Which of the following is true of inflation?
a.
It is an increase in the general price level of goods and services.
b.
The purchasing power of money increases as the result of inflation.
c.
Inflation is similar to interest payments on future money income, such as pensions and
receipts from outstanding loans.
d.
Inflation has no effect on real resources.
95. Suppose that the consumer price index at year-end 2010 was 180 and by year-end 2011 had risen to
189. What was the inflation rate during 2011?
a.
4.8 percent
b.
5 percent
c.
6 percent
d.
9 percent
96. Suppose that the consumer price index of a country was 160 at year-end 2007 and 168 at the end of
2008. What was the country’s inflation rate during 2008?
a.
5 percent
b.
8 percent
c.
60 percent
d.
68 percent
97. If the consumer price index (CPI) at the end of year one was 100 and was 108 at the end of year two,
the inflation rate during year two was
a.
zero; the CPI of 100 indicates that prices were stable.
b.
8 percent.
c.
5 percent.
d.
108 percent.
98. Suppose that the consumer price index (CPI) was 160 in 2010 and 166 in 2011, inflation during 2011
was
a.
zero; prices were stable.
b.
3.8 percent.
c.
6 percent.
d.
66 percent.
99. Suppose you received a 3 percent increase in your nominal wage. Over the year, inflation ran about 6
percent. Which of the following is true?
a.
Your real wage fell.
b.
Your nominal wage fell.
c.
Both your nominal and real wages decreased.
d.
Although your nominal wage fell, your real wage increased.
e.
Both nominal and real wages increased.
100. Suppose you received a 5 percent increase in your nominal wage. Over the year, inflation ran about 2
percent. Which of the following is true?
a.
Your real wage fell.
b.
Your nominal wage fell.
c.
Both your nominal and real wages decreased.
d.
Although your nominal wage fell, your real wage increased.
e.
Both your nominal and real wages increased.
The nominal salary paid to the president of the United States and the Consumer Price Index (CPI) are
given for various years below.
Table 7-9
Year
Presidential salary
CPI (2000 = 100)
1920
$75,000
11.6
1940
75,000
8.1
1960
100,000
17.2
1980
200,000
47.9
2000
400,000
100.0
101. Refer to Table 7-9. During which of the above years was the purchasing power of the president’s salary
highest?
a.
1920
b.
1940
c.
1960
d.
1980
e.
2000
102. Refer to Table 7-9. The salary of the president of the United States in 2000 was $400,000. In 1940, the
president’s salary was $75,000. If the Consumer Price Index was 8.1 in 1940 and 100 in 2000, the 1940
presidential salary measured in terms of the purchasing power of the dollar in 2000 would be
a.
less than $75,000.
b.
less than $400,000.
c.
approximately $668,850.
d.
approximately $750,000.
e.
approximately $926,000.
103. If ten years ago the price of a movie ticket was $5 and the average hourly wage was $10, and today the
price of a movie ticket is $8 and the average hourly wage is $20, then
a.
movies are now relatively cheaper in terms of work hours.
b.
movies are now relatively more expensive in terms of work hours.
c.
the relative price of movies has remained constant.
d.
workers now need to work longer hours to earn one movie ticket.
104. If the price of pizzas has risen from $4 to $5 at the same time that the price of an hour of aerobics class
has risen from $20 to $30, then
a.
pizzas have become relatively more expensive.
b.
aerobics classes have become relatively more expensive.
c.
the relative prices of pizzas and aerobics classes have remained constant.
d.
workers’ real income must have decreased.
105. If nominal GDP rises from one year to the next, then
a.
the economy must be producing a larger output of goods and services.
b.
prices at which goods and services are sold must be higher.
c.
either output, or the general level of prices, or both must be rising.
d.
employment and productivity must be rising.
106. Which statement represents most correctly the relationship between nominal GDP and real GDP?
a.
Nominal GDP measures base-year production using base-year prices, whereas real GDP
measures current production using current prices.
b.
Nominal GDP measures current production using base-year prices, whereas real GDP
measures current production using current prices.
c.
Nominal GDP measures current production using current prices, whereas real GDP
measures current production using base-year prices.
d.
Nominal GDP measures current production using current prices, whereas real GDP
measures base-year production using base-year prices.
107. 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.
108. Which of the following best explains why the chained consumer price index generally results in a
lower rate of inflation than the regular consumer price index?
a.
The chained index is based on a comprehensive bundle of goods and services, while the
regular CPI considers only changes in the prices of food and energy.
b.
The chained index makes allowance each month for shifts away from goods that have
become relatively more expensive; the regular CPI does not adjust for this factor.
c.
The chained consumer price index considers the impact of both rising and falling prices,
whereas the regular consumer price index considers only the impact of goods and services
with rising prices during the period.
d.
The chained consumer price index considers only the prices of goods and services
purchased by households, whereas the regular CPI also includes the price changes of
investment assets such as stocks and real estate.
109. What basket of goods 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
110. 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.
All of the above are correct.
111. If this year the CPI is 110 and last year it was 100, then
a.
the cost of the CPI basket of goods and services has increased this year by 110 percent.
b.
the price level as measured by the CPI has increased by 10 percent.
c.
the inflation rate for this year has increased by 10 percent over last year’s inflation rate.
d.
All of the above are correct.
112. An important difference between the GDP deflator and the consumer price index is that
a.
the GDP deflator reflects the prices of goods and services bought by producers, whereas
the consumer price index reflects the prices of goods and services bought by consumers.
b.
the GDP deflator reflects the prices of all final goods and services produced domestically,
whereas the consumer price index reflects the prices of some goods and services bought
by consumers.
c.
the GDP deflator reflects the prices of all final goods and services produced by a nation’s
citizens, whereas the consumer price index reflects the prices of final goods and services
bought by consumers.
d.
the GDP deflator reflects the prices of all goods and services bought by producers and
consumers, whereas the consumer price index reflects the prices of final goods and
services bought by consumers.
113. The price of dishwashers increases dramatically, causing a 1 percent increase in the CPI. The price
increase will most likely cause the GDP deflator to increase by
a.
more than 1 percent.
b.
less than 1 percent.
c.
1 percent.
d.
None of the above is correct; this particular price increase will not affect the GDP deflator.
114. 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.
115. Babe Ruth’s 1931 salary was $80,000. Government statistics show a consumer price index of 15.2 for
1931 and 215 for 2008. Ruth’s 1931 salary was equivalent to a 2008 salary of about
a.
$536,000.
b.
$828,000.
c.
$1,131,000.
d.
$1,216,000.
116. Suppose the CPI was 95 in 1955, and suppose currently the CPI is 475. According to the CPI, $100
today purchases the same amount of goods and services as
a.
$20.00 purchased in 1955.
b.
$33.33 purchased in 1955.
c.
$47.50 purchased in 1955.
d.
None of the above is correct.
117. Suppose the CPI was 104 in 1967, and suppose currently the CPI is 390. According to the CPI, $10 in
1967 purchased the same number of goods and services as
a.
$28.88 purchases today.
b.
$37.50 purchases today.
c.
$42.64 purchases today.
d.
$104.00 purchases today.
118. Real GDP per person
a.
minus real GDP per person from the previous period equals the growth rate of real GDP
per person.
b.
provides more meaningful comparisons across time and countries than real GDP.
c.
provides a less useful measure of the standard of living than nominal GDP per person.
d.
All of the above are correct.
119. A professor of economics gets a $100 a month raise. She figures that even with her new monthly
salary she will be unable to buy as many goods and services as she could 12 months ago.
a.
Her real and nominal salary have risen.
b.
Her real and nominal salary have fallen.
c.
Her real salary has risen and her nominal salary has fallen.
d.
Her real salary has fallen and her nominal salary has risen.
120. Your boss gives you an increase in the number of dollars you earn per hour. This increase in pay
makes
a.
your nominal wage increase. If your nominal wage rose by a greater percentage than the
price level, then your real wage also increased.
b.
your nominal wage increase. If your nominal wage rose by a greater percentage than the
price level, then your real wage decreased.
c.
your real wage increase. If your real wage rose by a greater percentage than the price
level, then your nominal wage also increased.
d.
your real wage decrease. If your real wage rose by a greater percentage than the price
level, then your nominal wage decreased.
121. If nominal GDP increases by 4 percent, then
a.
real output has increased by 4 percent
b.
the price level has increased by 4 percent
c.
consumer spending must have increased by 4 percent
d.
it is possible that all of the increase was caused by an increase in the price level
e.
net exports increased by 4 percent
122. In an economy with persistent inflation,
a.
real GDP will grow faster than nominal GDP.
b.
nominal GDP will grow faster than real GDP.
c.
nominal and real GDP will grow at the same rate.
d.
nominal and real GDP will both fall.
123. Suppose the consumer price index (CPI) for Year X is 130. This means the average price of goods and
services is
a.
currently $130.
b.
130 percent more in Year X than in the base year.
c.
130 percent more in the base year than in Year X.
d.
priced at 30 percent more in Year X than in the base year.
124. As inflation drives up prices, people attempt to find substitutes and adjust what they buy. The resulting
substitution bias problem causes the CPI to
a.
overstate the impact of higher prices on consumers.
b.
consistently underestimate the true inflation rate.
c.
omit the benefits of product quality improvements.
d.
have larger fluctuations than other price indexes.
125. Suppose a market basket of goods and services costs $1,000 in the base year and the consumer price
index (CPI) is currently 110. This indicates the price of the market basket of goods and services is now
a.
$110.
b.
$1,000.
c.
$1,100.
d.
$1,225.
126. The Consumer Price Index compares the
a.
prices of all goods and services in the economy compared to the prices of those goods and
services in a base year.
b.
prices of consumer goods and services that a household purchases to the prices of those
goods and services purchased in a base year.
c.
prices of producer goods and services that are made for consumers to the prices of those
goods and services in a base year.
d.
prices of goods and services that are purchased by producers to the prices of those goods
and services in a base year.
e.
prices of goods and services that are purchased by consumer manufacturers to the prices of
those goods and services in a base year.
127. Last year the Jones family earned $40,000. This year their income is $42,000. In an economy with an
inflation rate of 10 percent, which of the following is correct?
a.
The Jones’ nominal income and real income have both fallen.
b.
The Jones’ nominal income and real income have both risen.
c.
The Jones’ nominal income has increased and their real income has fallen.
d.
The Jones’ nominal income has decreased and their real income has risen.
128. Your father tells you he earned $1.50 per hour when he was 16 in 1969. Given that the CPI was 36.0 in
1969 and 215 in 2008, how much would you have to earn in 2008 in order to have the same real wage
as your father in 1969?
a.
$1.50
b.
$5.00
c.
$8.95
d.
$15.00
129. Your brother graduated from college 10 years ago and started to work at a salary of $20,000. You
expect to graduate this year and start to work for $35,000. If the consumer price index was 80 ten years
ago and is 120 this year, who will have received the higher real starting salary?
a.
You will have.
b.
Your brother did.
c.
You and your brother both will have started at the same real salary level.
d.
Not enough information is supplied to answer the question.
130. Over time, GDP may increase as the result of either (i) expansion in the quantities of goods produced
or (ii) higher prices. Which of the following is true?
a.
(i) will generally increase living standards, but (ii) will not.
b.
(ii) will generally increase living standards, but (i) will not.
c.
Both (i) and (ii) will generally increase living standards.
d.
Neither (i) nor (ii) will generally increase living standards.
131. Why is it important to use real rather than nominal GDP figures when making comparisons of output
across time periods?
a.
The real GDP figures are a better measure of changes in the general level of prices.
b.
The real figures will reflect changes in the quantity of output and not changes in the
general level of prices.
c.
The real figures will reflect changes in the general level of prices as well as changes in the
quantity of output.
d.
The real GDP figures adjust for changes in the level of employment.
132. A price index is designed to measure
a.
changes in the general level of employment across time periods.
b.
changes in the quantity of output produced across time periods.
c.
the market value of output produced during the current period with the value of output
produced during an earlier time period.
d.
the cost of buying a market basket of goods at a point in time relative to the cost of buying
the same market basket during an earlier time period.
133. The consumer price index is
a.
a measure of the increase in the average price of all of the goods that are included in the
calculation of GDP.
b.
a comparison of the cost of buying a typical bundle of goods during a given period with
the cost of buying the same bundle during an earlier base period.
c.
the ratio of the average price of a typical market basket of goods compared to the cost of
producing those goods during the previous year.
d.
a comparison of the cost of the typical bundle of goods consumed in period 1 with the cost
of a different bundle of goods typically consumed in period 2.
134. The consumer price index (CPI) is calculated
a.
using a fixed basket of goods and, therefore, will tend to understate inflation.
b.
using a fixed basket of goods and, therefore, will tend to overstate inflation.
c.
using a constantly changing basket of goods and, therefore, will tend to understate
inflation.
d.
using a constantly changing basket of goods and, therefore, will tend to overstate inflation.
135. The consumer price index is designed to measure the extent to which
a.
the cost of a typical bundle (market basket) of consumer goods has changed over time.
b.
consumers have increased their spending over time.
c.
GDP is allocated to consumers, rather than to business or government, over time.
d.
prices paid by employers to resource owners have changed over time.
136. A price index like the CPI, which uses a fixed basket of goods from one year to the next, will tend to
overstate inflation because
a.
producers are likely to change the number of goods they sell from year to year.
b.
producers will generally reduce the quality of goods as prices increase over time.
c.
consumers will tend to substitute away from goods that become more expensive.
d.
consumers will usually reduce their consumption of goods when they become relatively
cheaper.
137. An increase in the Consumer Price Index indicates that
a.
the real income of households is increasing.
b.
the purchasing power of the dollar is increasing.
c.
the cost of buying the typical bundle of goods consumed by households is increasing.
d.
the real net worth of consumers is increasing.
138. The 2012 box office receipts for the movie The Avengers were $1,515.8 million. By way of
comparison, the 1977 receipts for Star Wars were $798.0 million. If the Consumer Price Index was
60.6 in 1977 and 229.6 in 2012, which of the following is true?
a.
The real receipts of The Avengers were almost four times greater than those for Star Wars.
b.
The real receipts of Star Wars were nearly two times greater than those for The Avengers.
c.
The real receipts of The Avengers were one-third of those for Star Wars.
d.
The real receipts of Star Wars were about 33 percent greater than those for The Avengers.
139. The price of a gallon of gasoline was $2.01 in May 2004 compared to 39 cents in 1973. However, the
Consumer Price Index was 44.4 in 1973 compared to 189.1 in May 2004 (1980 − 1984 = 100). In
terms of the purchasing power of the dollar in 2004, the 1973 price of gasoline was
a.
$0.39.
b.
$0.44.
c.
$1.66.
d.
$2.15.
140. In 1980, the price of a gallon of gasoline was $1.25. The Consumer Price Index was 82.4 in 1980
compared to 215.3 in 2008 (1983 − 1984 = 100). Measured in 2008 dollars, the price of gasoline in
1980 was
a.
$0.56.
b.
$1.25.
c.
$2.37.
d.
$3.27.
141. Between 1991 and 2008, the federal minimum wage increased from $4.25 per hour to $6.55 per hour,
while the CPI increased from 136.2 to 215.3. We can conclude from this that
a.
the minimum wage increased in nominal and in real terms.
b.
the minimum wage decreased in nominal terms but increased in real terms.
c.
the minimum wage increased in nominal terms but decreased in real terms.
d.
more information is needed to determine what happened to the real minimum wage over
the period.