66) If a new and better good replaced an older and less expensive good, then the price level
measured by the CPI ________.
A) is lower than the actual price level
B) is higher than the actual price level
C) might be either higher or lower than the actual price
D) is the same as the actual price level because it measures the prices of the actual goods
67) Price indexes can overstate inflation because they
A) omit some quality improvements.
B) do not contain the prices of any used goods.
C) do not contain the prices of foreign goods.
D) do not contain the prices of services.
68) As currently calculated, the CPI tends to overstate the true inflation rate because
A) we cannot know what the true inflation rate is.
B) it fails to correctly measure quality changes for some products.
C) the market basket selected is inappropriate.
D) the market basket fails to weigh housing costs sufficiently.
69) The technique currently used to calculate the CPI implicitly assumes that over time
consumers buy
A) relatively more of goods whose relative prices are rising.
B) relatively less of goods whose relative prices are rising.
C) the same relative quantities of goods as in a base year.
D) goods and services whose quality improves at the rate of growth of real income.
70) Substitution bias in the CPI refers to the fact that the CPI
A) takes into account the substitution of goods by consumers when relative prices change.
B) takes no account of the substitution of goods by consumers when relative prices change.
C) substitutes quality changes whenever they occur without taking account of the cost of the
quality changes.
D) substitutes relative prices for absolute prices of goods.
71) In July 2014, the CPI inflation rate was 0.3 percent while the core CPI inflation rate was 0.1
percent. The difference between these two measurements of inflation indicates
A) prices for food and fuel were increasing more rapidly than prices for other goods.
B) prices for food and fuel were increasing less rapidly than prices for other goods.
C) the underlying inflation rate was higher than the overall inflation rate.
D) a negative underlying inflation rate.
72) As of July 2012, the 12 month CPI inflation rate was 1.4 percent and the 12 month core CPI
inflation rate was 2.1 percent. The difference between these two measurements of inflation
indicates
A) prices for food and fuel grew less rapidly than prices for other goods.
B) prices for food and fuel grew more rapidly than prices for other goods.
C) the underlying inflation rate was lower than the overall inflation rate.
D) hyperinflation.
73) At the end of last year, the CPI equaled 120. At the end of this year, the CPI equals 132.
What is the inflation rate over this year?
A) 6 percent
B) 10 percent
C) 12 percent
D) None of the above answers are correct because more information is needed to calculate the
inflation rate.
74) If last year’s price level was 100 and this year’s price level is 114, over the year the inflation
rate has been
A) 14 percent.
B) 114 percent.
C) 12 percent
D) 100 percent.
75) Of the following sequences of price levels, which CORRECTLY represents a 5 percent
inflation rate?
A) 100, 100, 100, 100
B) 100, 105, 105, 105
C) 100, 105, 110, 115
D) 100, 105, 110.25, 115.76
76) The commodity substitution bias is that
A) consumers substitute high-quality goods for low-quality goods.
B) government spending is a good substitute for investment expenditures.
C) national saving and foreign borrowing are interchangeable.
D) consumers decrease the quantity they buy of goods whose relative prices rise and increase the
quantity of goods whose relative price falls.
4 News Based Questions
1) The New York Times reported in November 2008 that 240,000 additional people lost their jobs
which increased the unemployment rate to 6.5 percent. In addition, it was noted that a large
number of college graduates were “taking jobs that do not require a college degree.” It was also
expected that “teens will be thrown out of the labor market….causing youths to miss experience”
that could help them prepare for higher-skilled jobs.
The article reflects the idea that unemployment is a problem because it results in
A) a loss of human capital.
B) fewer discouraged workers.
C) a loss of income.
D) a decrease in the labor force.
2) The table below shows data regarding Germany’s labor market.
Year
Labor Force
(millions)
Number of
Employed
(millions)
Population
(millions)
2006
43.7
39.01
82.3
2007
43.7
39.06
82.2
2008
43.6
39.8
82.1
The data show that Germany’s unemployment rate in 2007 was
A) 9.8 percent.
B) 8.4 percent
C) 5.6 percent
D) More information is needed to answer this question.
3) The table below shows data regarding Germany’s labor market.
Year
Labor Force
(millions)
Number of
Employed
(millions)
Population
(millions)
2006
43.7
39.01
82.3
2007
43.7
39.06
82.2
2008
43.6
39.8
82.1
The data show that Germany’s unemployment rate between 2007 and 2008
A) increased.
B) decreased
C) stayed the same.
D) cannot be determined because the population decreased.
4) The table below shows data regarding Germany’s labor market.
Year
Labor Force
(millions)
Number of
Employed
(millions)
Population
(millions)
Working-age
Population
(millions)
2006
43.7
39.01
82.3
54.9
2007
43.7
39.06
82.2
54.7
2008
43.6
39.8
82.1
54.6
The data show that Germany’s employment-to-population ratio is ________ in 2007.
A) 92 percent
B) 47.5 percent
C) 67 percent
D) 80 percent
5) The table below shows data regarding Germany’s labor market.
Year
Labor Force
(millions)
Number of
Employed
(millions)
Population
(millions)
Working-age
Population
(millions)
2006
43.7
39.01
82.3
54.9
2007
43.7
39.06
82.2
54.7
2008
43.6
39.8
82.1
54.6
The data show that Germany’s labor force participation rate is ________ in 2007.
A) 80 percent
B) 47.5 percent
C) 67 percent
D) 78 percent
6) An article in the Financial Times reports on a trend by college students to take a year off after
graduation given the lack of success in finding a job. “In a survey published last month by TMP
Worldwide… 54 per cent of the final-year undergraduate interviewees were thinking about taking
a gap year and one in 10 was planning to wait for a year to escape the financial chaos and wait
for the economy to either improve or for the picture to become clearer.”
www.ft.com, 10/13/2008
These choices add to the fluctuations seen in the ________ as workers leave the labor force
given their unsuccessful job searches.
A) labor force participation rate
B) employment rate
C) efficiency wage
D) inflation rate
7) NPR (“Certain Green Industries Have Job Openings”, November 12, 2008) reported on a story
about wind turbine manufacturers in Ohio having trouble finding skilled workers. The report
noted that as a result tens of thousands of people having been laid off, there is “a huge pool of
job-seekers.” The firms claim to “offer good pay and benefits.” A representative from the United
Steelworkers claims that their union members have easily transferrable skills, but the pay is too
low, around $30,000 annually. A manager at Apollo Alliance says that workers in the new
industry need different skills than those in the old steel industry.
The type of unemployment described in the story is ________ unemployment.
A) cyclical
B) structural
C) frictional
D) efficiency wage
8) Reflecting the state of the economy in 2008, the Bureau of Labor Statistics reported in
October that over 1000 jobs were lost in the legal services sector. For example, one firm in
Chicago stated that it had fired 54 lawyers in 2008. A representative from the firm stated that
most had worked in its real estate division.
www.nytimes.com, 11/11/2008
The lawyers that were fired are an example of ________ unemployment.
A) frictional
B) structural
C) efficiency wage
D) cyclical
9) In late 2006, the unemployment rate increased from 4.4 percent to 4.5 percent. It was reported
that new jobs were created in several sectors including accounting, engineering services,
computer design and education. These increases offset job losses in the construction and
automobile industries. At the same time, the natural unemployment rate was estimated to be
about 5.5 percent
www.nytimes.com, 12/9/2006
Based on the story, the labor market reflects
A) a positive output gap.
B) a negative output gap.
C) cyclical unemployment.
D) efficiency wages.
10) Inflation in Vietnam rose to 27 percent in July 2008—the highest inflation rate in Asia.
“Squeezed on all sides, people are cutting back on food, limiting travel, looking for second jobs,
delaying major purchases and waiting for the cost of a wedding to go down before
marrying…Given this slowdown, Vietnam… is scaling back its plans for growth and economic
development. … Some are losing confidence in the ability of the government to manage the
economy. And rumors of price increases have caused panic buying of fuel and rice.”
www.nytimes.com, 8/23/2008
The story provides an example of how inflation
A) redistributes income.
B) diverts resources from production.
C) leads to increases in the consumer price index.
D) can lead to changes in the CPI market basket.
11) In 2000, you could buy a Cadillac DTS for $45,000. In 2011, the Cadillac DTS sold for
$55,000. While both models include anti-lock brakes and air bags (along with other similar
features), the 2011 model also includes satellite radio and new technology that provides
improved gas mileage and safer driving. If the Cadillac DTS was included in the CPI basket, it
would create
A) a downward bias in the inflation rate.
B) an upward bias in the CPI as a result of quality change bias.
C) an upward bias in the CPI as a result of commodity substitution bias.
D) a downward bias in the CPI as a result of new goods bias.
12) The table below shows the price index for Zimbabwe starting in 2000.
Year
Price Index
2000
100.0
2001
173.4
2002
404.37
2003
1880.5
2004
8462.2
2005
28,586.6
2006
319,222.5
www.econstats.com
Which of the following statements CORRECTLY describe the behavior of prices in Zimbabwe?
I. The cost of the CPI basket increased.
II. The inflation rate was 73.4 percent between 2000 and 2001.
A) I only
B) II only
C) both I and II
D) neither I nor II
13) The table below shows the price index for Zimbabwe starting in 2000.
Year
Price Index
2000
100.0
2001
173.4
2002
404.37
2003
1880.5
2004
8462.2
2005
28,586.6
2006
319,222.5
www.econstats.com
The data show that
A) the inflation rate between the base year and 2001 is 73.4 percent.
B) new goods bias and quality change bias are responsible for most of Zimbabwe’s inflation.
C) the inflation rate between 2005 and 2006 was 319.2 percent.
D) while Zimbabwe experienced a high price level, it did not experience high inflation.
14) The table below shows the price index for China starting in 2000.
Year
Price Index
2000
100.0
2001
100.73
2002
99.95
2003
101.12
2004
105.06
2005
106.95
2006
108.52
www.econstats.com
Which of the following statements CORRECTLY describes the behavior of prices in China?
A) The cost of the CPI basket decreased in 2002.
B) China experienced a high price level and high inflation.
C) Inflation reached 73% between the base year and 2001.
D) The inflation rate between 2005 and 2006 was 14.4 percent.
15) The table below shows the price index for China starting in 2000.
Year
Price Index
2000
100.0
2001
100.73
2002
99.95
2003
101.12
2004
105.06
2005
106.95
2006
108.52
www.econstats.com
The inflation rate between 2004 and 2005 was
A) 3.9 percent
B) 2.8 percent
C) 1.8 percent
D) 0.7 percent.
16) ABC news in Australia reported that the average annual wage in 2008 was $13,308. To
calculate the real wage rate in Australia, you would need to know
A) Australia’s inflation rate between 2007 and 2008.
B) Australia’s price level in 2008.
C) the core inflation rate in Australia in 2008.
D) the exchange rate between the U.S. dollar and the Australian dollar.
17) The table below shows Vietnam’s price index between 2004 and 2007.
Year
Price Index
2004
115.15
2005
124.65
2006
134
2007
145.12
www.econstats.com
From the data, we can conclude that
A) the inflation rate 2005 and 2006 was 7.5 percent.
B) food and energy prices in Vietnam were increasing between 2004 and 2007.
C) commodity substitution bias occurred over the four years.
D) deflation occurred between 2005 and 2006 as price increased more slowly than in 2004.
5 Essay Questions
1) Why is unemployment a problem?
2) How does the Current Population Survey determine if a person should be counted in the labor
force?
3) How is the unemployment rate calculated? Include in your answer the process by which the
U.S. Census Bureau classifies the data it collects in its Current Population Survey.
4) The current U.S. population is about 300 million yet the current U.S. labor force is only about
150 million. What subtractions are made from the population number to set it equal to the labor
force?
5) What is the definition of the unemployment rate? How are part-time workers and discouraged
workers treated when calculating the unemployment rate?
6) How does the unemployment rate change in a recession and in an expansion?
7) Define the unemployment rate and labor-force participation rate. Discuss the differences
between these two rates.
8) What is a “marginally attached worker”?
9) What is a discouraged worker? How do they affect the unemployment rate?
10) Explain how the labor force participation rate and the unemployment rate change in a
recession.
11) List and define the three types of unemployment.
12) What are the three types of unemployment and how do they change over the business cycle?
13) Give an example of a frictionally unemployed person.
14) Define and give an example of how a spell of frictional unemployment can begin.
15) Can frictional unemployment ever be totally eliminated? Explain your answer.
16) Explain the difference between frictional and structural unemployment.
17) Give an example of a structurally unemployed person.
18) Define and give an example of how a spell of structural unemployment can begin.
19) Give an example of a cyclically unemployed person.
20) Explain what type of unemployment changes with the business cycle and how it changes.
21) Why is there unemployment even when the economy is at “full employment”?
22) What is the relationship between the natural unemployment rate, the unemployment rate,
potential GDP, and actual GDP?
23) Explain the relationship(s) between full employment, cyclical unemployment, the natural
unemployment rate, and potential GDP.
24) Consider the following statement: “Real GDP and potential GDP are always equal.” Is this
statement true or false? Explain your answer.
25) What is potential GDP and what is the relationship between actual and potential real GDP?