Question 1

Arguably there are three reasons why the consumer price index (CPI) overstates inflation.List the reasons and explain each one.

Accepted Answer

Substitution: Consumers do not buy the s

Question 2

Suppose a basket of goods and services has been selected to calculate the consumer price index (CPI) and 2002 has been selected as the base year.In 2002,the basket's cost was $600; in 2004,the basket's cost was $650; and in 2006,the basket's cost was $700.The value of the CPI in 2004 was (round to one decimal place):

Accepted Answer

A)  92.3. 
B)  106.3. 
C)  108.3. 
D)  152.0. 
E)  more than 155.0. 
A)  92.3. 
B)  106.3. 
C)  108.3. 
D)  152.0. 
E)  more than 155.0.

Question 3

Suppose a basket of goods and services has been selected to calculate the consumer price index (CPI) and 2002 has been chosen as the base year.In 2002,the basket's cost was $76.00; in 2004,the basket's cost was $79.50; and in 2006,the basket's cost was $85.00.The value of the CPI was:

Accepted Answer

A)  100 in 2002. 
B)  108 in 2004. 
C)  120 in 2006. 
D)  at least 118 in 2007. 
E)  no more than 90 in 2001. 
A)  100 in 2002. 
B)  108 in 2004. 
C)  120 in 2006. 
D)  at least 118 in 2007. 
E)  no more than 90 in 2001.

Question 4

It has been shown that increases in the money supply are directly related to the rate of inflation.If the previous statement is true,then:

Accepted Answer

A)  nations that increase their money supply most rapidly will be the most prosperous. 
B)  hyperinflation will normally be associated with large increases in the money supply. 
C)  hyperinflation will normally be associated with large decreases in the money supply. 
D)  menu costs will rise when the money supply falls. 
E)  real wages rise whenever the money supply increases. 
A)  nations that increase their money supply most rapidly will be the most prosperous. 
B)  hyperinflation will normally be associated with large increases in the money supply. 
C)  hyperinflation will normally be associated with large decreases in the money supply. 
D)  menu costs will rise when the money supply falls. 
E)  real wages rise whenever the money supply increases.

Question 5

Wages are often tied to expected rates of inflation; thus one reason why inflation is important is that:

Accepted Answer

A)  when wages rise faster than inflation, companies lose money. 
B)  when wages rise slower than inflation, workers suffer but corporate profits increase. 
C)  inflation creates uncertainty about costs and prices, which affects both employees and employers. 
D)  all inflation will eventually lead to hyperinflation, political instability, and war. 
E)  menu costs mean restaurants have to print new menus, which is costly and unpleasant. 
A)  when wages rise faster than inflation, companies lose money. 
B)  when wages rise slower than inflation, workers suffer but corporate profits increase. 
C)  inflation creates uncertainty about costs and prices, which affects both employees and employers. 
D)  all inflation will eventually lead to hyperinflation, political instability, and war. 
E)  menu costs mean restaurants have to print new menus, which is costly and unpleasant.

Question 6

Chicken becomes more expensive in 2008 at Wegmans in State College,Pennsylvania.This means:

Accepted Answer

A)  the consumer price index (CPI) will rise in 2008 if, and only if, State College is one of the 38 geographic locations and oranges are one of the 8,000 goods included in the CPI. 
B)  the CPI will almost certainly rise in 2008, even if State College is not included, as long as chicken is included and becomes more expensive on average at the indexed locations. 
C)  the CPI will likely fall if the average weighted price of chicken increases in the United States and the price of chicken at Wegmans makes almost no difference in the CPI. 
D)  the CPI might rise or fall and the price of chicken at Wegmans could make a very small difference in the CPI if chicken at Wegmans is included in the index.However, chicken would be a relatively small portion of the entire CPI if it is included at all. 
E)  chicken prices are never included in the CPI because the creator of the CPI, James Gapinski, did not like chickens. 
A)  the consumer price index (CPI) will rise in 2008 if, and only if, State College is one of the 38 geographic locations and oranges are one of the 8,000 goods included in the CPI. 
B)  the CPI will almost certainly rise in 2008, even if State College is not included, as long as chicken is included and becomes more expensive on average at the indexed locations. 
C)  the CPI will likely fall if the average weighted price of chicken increases in the United States and the price of chicken at Wegmans makes almost no difference in the CPI. 
D)  the CPI might rise or fall and the price of chicken at Wegmans could make a very small difference in the CPI if chicken at Wegmans is included in the index.However, chicken would be a relatively small portion of the entire CPI if it is included at all. 
E)  chicken prices are never included in the CPI because the creator of the CPI, James Gapinski, did not like chickens.

Question 7

Joe Kowalski invents a new product,and this new product becomes cheaper over time.This can be problematic because:

Accepted Answer

A)  the consumer price index (CPI) will include Joe's new product immediately if it is a consumer good, but as a consumer good, it will not be included in the gross domestic product (GDP) deflator. 
B)  the percent change in the CPI will be distorted, but the change in the GDP deflator will not be, regardless of whether the product is a consumer good or a producer good. 
C)  it is unlikely the CPI will include Joe's new product immediately, even if it is a consumer good. 
D)  money illusion will cause consumers to buy more of this good than the CPI would otherwise reflect. 
E)  this good might be produced in a geographic location that is not included in the CPI. 
A)  the consumer price index (CPI) will include Joe's new product immediately if it is a consumer good, but as a consumer good, it will not be included in the gross domestic product (GDP) deflator. 
B)  the percent change in the CPI will be distorted, but the change in the GDP deflator will not be, regardless of whether the product is a consumer good or a producer good. 
C)  it is unlikely the CPI will include Joe's new product immediately, even if it is a consumer good. 
D)  money illusion will cause consumers to buy more of this good than the CPI would otherwise reflect. 
E)  this good might be produced in a geographic location that is not included in the CPI.

Question 8

Why would knowing the cost of living index be important in real life?
(Hint: Consider the following scenario.You get two job offers: one in San Francisco paying $80,000 per year and the other in Dallas paying $68,000 per year.)

Accepted Answer

The cost of living index will help you d

Question 9

Inflation in Zimbabwe in 2008:

Accepted Answer

A)  was very low. 
B)  did not exist; during 2008 Zimbabwe had deflation. 
C)  was about the same as its neighbors, somewhere around 20%. 
D)  was very high at the beginning of the year but fell when Robert Mugabe agreed to share power with Morgan Tsvangarai. 
E)  reached the rate of 80 billion percent per month. 
A)  was very low. 
B)  did not exist; during 2008 Zimbabwe had deflation. 
C)  was about the same as its neighbors, somewhere around 20%. 
D)  was very high at the beginning of the year but fell when Robert Mugabe agreed to share power with Morgan Tsvangarai. 
E)  reached the rate of 80 billion percent per month.

Question 10

Refer to the following figure when answering the next five questions:
  
-In the figure,which of the following changes in the consumer price index (CPI) of Brazil would most closely reflect what is depicted during the 2003-2004 time period?

Accepted Answer

A)  January 2003: 100; July 2003: 118; July 2004: 120 
B)  January 2003: 200; July 2003: 236; July 2004: 250 
C)  January 2003: 100; July 2003: 118; July 2004: 200 
D)  January 2003: 110; July 2003: 120; July 2004: 130 
E)  January 2003: 100; July 2003: 118; July 2004: 106 
A)  January 2003: 100; July 2003: 118; July 2004: 120 
B)  January 2003: 200; July 2003: 236; July 2004: 250 
C)  January 2003: 100; July 2003: 118; July 2004: 200 
D)  January 2003: 110; July 2003: 120; July 2004: 130 
E)  January 2003: 100; July 2003: 118; July 2004: 106

Question 11

Education typically composes about:

Accepted Answer

A)  3% of the CPI 
B)  5% of the CPI. 
C)  10% of the CPI. 
D)  15% of the CPI. 
E)  20% of the CPI. 
A)  3% of the CPI 
B)  5% of the CPI. 
C)  10% of the CPI. 
D)  15% of the CPI. 
E)  20% of the CPI.

Question 12

Assume tuition at Penn State cost $6,142 (per semester) in 2007 and $7,562 in 2012.If the price index was 207.34 in 2007 and 226 in 2012,then we could say:

Accepted Answer

A)  tuition has increased more slowly than inflation. 
B)  tuition has increased more rapidly than inflation. 
C)  tuition has increased at about the same rate as inflation. 
D)  tuition is an inferior good. 
E)  tuition suffers from menu costs due to inflation. 
A)  tuition has increased more slowly than inflation. 
B)  tuition has increased more rapidly than inflation. 
C)  tuition has increased at about the same rate as inflation. 
D)  tuition is an inferior good. 
E)  tuition suffers from menu costs due to inflation.

Question 13

Describe menu costs.

Accepted Answer

When inflation occurs,producers have to

Question 14

Consider a nation in which the price index was 150 last year and this year it is 130.Which statement is correct?

Accepted Answer

A)  Inflation was 20% this year. 
B)  Deflation was 20% this year. 
C)  Housing prices must have fallen. 
D)  Inflation was 13.33% this year. 
E)  Deflation was 13.33% this year. 
A)  Inflation was 20% this year. 
B)  Deflation was 20% this year. 
C)  Housing prices must have fallen. 
D)  Inflation was 13.33% this year. 
E)  Deflation was 13.33% this year.

Question 15

You are offered two jobs,one in Chicago paying $67,000 and one in Philadelphia paying $79,000.The price index in Chicago is 110.8,and in Philadelphia it is 126.5.If real wages are the only consideration,then:

Accepted Answer

A)  you would be indifferent between the two jobs because the real wages would be about the same (within 2%). 
B)  you would definitely take the job in Chicago because the real wage is higher there. 
C)  you would definitely take the job in Philadelphia because the real wage is higher there. 
D)  you would suffer from money illusion and be conflicted. 
E)  because there is a direct correlation between the real wage and the nominal wage, the job in Philadelphia is definitely the one to take. 
A)  you would be indifferent between the two jobs because the real wages would be about the same (within 2%). 
B)  you would definitely take the job in Chicago because the real wage is higher there. 
C)  you would definitely take the job in Philadelphia because the real wage is higher there. 
D)  you would suffer from money illusion and be conflicted. 
E)  because there is a direct correlation between the real wage and the nominal wage, the job in Philadelphia is definitely the one to take.

Question 16

The housing crisis has some roots in inflation because:

Accepted Answer

A)  new houses were new goods and services and the consumer price index (CPI) didn't measure them. 
B)  builders confused inflation with an increase in demand and hence overbuilt-a price confusion problem. 
C)  there were menu costs associated with higher housing prices. 
D)  money illusion occurred when builders thought that real prices were rising. 
E)  money illusion occurred when housing buyers thought real wages were rising. 
A)  new houses were new goods and services and the consumer price index (CPI) didn't measure them. 
B)  builders confused inflation with an increase in demand and hence overbuilt-a price confusion problem. 
C)  there were menu costs associated with higher housing prices. 
D)  money illusion occurred when builders thought that real prices were rising. 
E)  money illusion occurred when housing buyers thought real wages were rising.

Question 17

Assume tuition and fees at North Carolina State University cost $4,259 in 2004 and $7,787 in 2012.If the price index was 184 in 2004 and 226 in 2012,then we could say:

Accepted Answer

A)  tuition has increased more slowly than inflation. 
B)  tuition has increased more rapidly than inflation. 
C)  tuition has increased at about the same rate as inflation. 
D)  nominal tuition has decreased. 
E)  tuition suffers from money illusion due to inflation. 
A)  tuition has increased more slowly than inflation. 
B)  tuition has increased more rapidly than inflation. 
C)  tuition has increased at about the same rate as inflation. 
D)  nominal tuition has decreased. 
E)  tuition suffers from money illusion due to inflation.

Question 18

If mustard now costs $0.75 when today's price index is 225,and if the price index in 1970 was 38,we would most accurately say that:

Accepted Answer

A)  mustard cost about $4.44 in 1970. 
B)  if mustard cost $0.10 in 1970, it was relatively cheap as an inflation-adjusted price. 
C)  mustard cost about $0.20 in 1970. 
D)  mustard's price would never increase at the same rate as inflation because it is a food item. 
E)  ketchup would cost about $0.13 in 1970 because it typically costs about the same as mustard. 
A)  mustard cost about $4.44 in 1970. 
B)  if mustard cost $0.10 in 1970, it was relatively cheap as an inflation-adjusted price. 
C)  mustard cost about $0.20 in 1970. 
D)  mustard's price would never increase at the same rate as inflation because it is a food item. 
E)  ketchup would cost about $0.13 in 1970 because it typically costs about the same as mustard.

Question 19

From 1960 until 2012,the long-run average rate of inflation in the United States was:

Accepted Answer

A)  less than 1%. 
B)  about 4%. 
C)  about 8%. 
D)  about 12%. 
E)  negative. 
A)  less than 1%. 
B)  about 4%. 
C)  about 8%. 
D)  about 12%. 
E)  negative.

Question 20

Consider a nation in which the price index last year was 130 and this year it is 150.Which statement is correct?

Accepted Answer

A)  Inflation was 20% this year. 
B)  Deflation was 20% this year. 
C)  Housing prices must have risen. 
D)  Inflation was 38% this year. 
E)  Deflation was 38% this year. 
A)  Inflation was 20% this year. 
B)  Deflation was 20% this year. 
C)  Housing prices must have risen. 
D)  Inflation was 38% this year. 
E)  Deflation was 38% this year.

Arguably there are three reasons why the consumer price index (CPI) overstates inflation.List the reasons and explain each one.

Suppose a basket of goods and services has been selected to calculate the consumer price index (CPI) and 2002 has been chosen as the base year.In 2002,the basket's cost was $76.00; in 2004,the basket's cost was $79.50; and in 2006,the basket's cost was $85.00.The value of the CPI was:

It has been shown that increases in the money supply are directly related to the rate of inflation.If the previous statement is true,then:

Wages are often tied to expected rates of inflation; thus one reason why inflation is important is that:

Chicken becomes more expensive in 2008 at Wegmans in State College,Pennsylvania.This means:

Joe Kowalski invents a new product,and this new product becomes cheaper over time.This can be problematic because:

Why would knowing the cost of living index be important in real life? (Hint: Consider the following scenario.You get two job offers: one in San Francisco paying $80,000 per year and the other in Dallas paying $68,000 per year.)

Inflation in Zimbabwe in 2008:

Refer to the following figure when answering the next five questions: -In the figure,which of the following changes in the consumer price index (CPI) of Brazil would most closely reflect what is depicted during the 2003-2004 time period?

Education typically composes about:

Assume tuition at Penn State cost $6,142 (per semester) in 2007 and $7,562 in 2012.If the price index was 207.34 in 2007 and 226 in 2012,then we could say:

Describe menu costs.

Consider a nation in which the price index was 150 last year and this year it is 130.Which statement is correct?

You are offered two jobs,one in Chicago paying $67,000 and one in Philadelphia paying $79,000.The price index in Chicago is 110.8,and in Philadelphia it is 126.5.If real wages are the only consideration,then:

The housing crisis has some roots in inflation because:

Assume tuition and fees at North Carolina State University cost $4,259 in 2004 and $7,787 in 2012.If the price index was 184 in 2004 and 226 in 2012,then we could say:

If mustard now costs $0.75 when today's price index is 225,and if the price index in 1970 was 38,we would most accurately say that:

From 1960 until 2012,the long-run average rate of inflation in the United States was:

Consider a nation in which the price index last year was 130 and this year it is 150.Which statement is correct?

The Five Foundations of Economics

Model Building and Gains From Trade

The Market at Work: Supply and Demand

Price Controls

The Efficiency of Markets and the Costs of Taxation

Introduction to Macroeconomics and Gross Domestic Product

Unemployment

Savings, interest Rates, and the Market for Loanable Funds

Financial Markets and Securities

Economic Growth and the Wealth of Nations

Growth Theory

The Aggregate Demandaggregate Supply Model

The Great Recession, the Great Depression, and Great Macroeconomic Debates

Federal Budgets: the Tools of Fiscal Policy

Fiscal Policy

Money and the Federal Reserve

Monetary Policy

International Trade

International Finance

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Exam 8: The Price Level and Inflation

Arguably there are three reasons why the consumer price index (CPI) overstates inflation.List the reasons and explain each one.

Suppose a basket of goods and services has been selected to calculate the consumer price index (CPI) and 2002 has been chosen as the base year.In 2002,the basket's cost was $76.00; in 2004,the basket's cost was $79.50; and in 2006,the basket's cost was $85.00.The value of the CPI was:

It has been shown that increases in the money supply are directly related to the rate of inflation.If the previous statement is true,then:

Wages are often tied to expected rates of inflation; thus one reason why inflation is important is that:

Chicken becomes more expensive in 2008 at Wegmans in State College,Pennsylvania.This means:

Joe Kowalski invents a new product,and this new product becomes cheaper over time.This can be problematic because:

Why would knowing the cost of living index be important in real life? (Hint: Consider the following scenario.You get two job offers: one in San Francisco paying $80,000 per year and the other in Dallas paying $68,000 per year.)

Inflation in Zimbabwe in 2008:

Refer to the following figure when answering the next five questions: -In the figure,which of the following changes in the consumer price index (CPI) of Brazil would most closely reflect what is depicted during the 2003-2004 time period?

Education typically composes about:

Assume tuition at Penn State cost $6,142 (per semester) in 2007 and $7,562 in 2012.If the price index was 207.34 in 2007 and 226 in 2012,then we could say:

Describe menu costs.

Consider a nation in which the price index was 150 last year and this year it is 130.Which statement is correct?

You are offered two jobs,one in Chicago paying $67,000 and one in Philadelphia paying $79,000.The price index in Chicago is 110.8,and in Philadelphia it is 126.5.If real wages are the only consideration,then:

The housing crisis has some roots in inflation because:

Assume tuition and fees at North Carolina State University cost $4,259 in 2004 and $7,787 in 2012.If the price index was 184 in 2004 and 226 in 2012,then we could say:

If mustard now costs $0.75 when today's price index is 225,and if the price index in 1970 was 38,we would most accurately say that:

From 1960 until 2012,the long-run average rate of inflation in the United States was:

Consider a nation in which the price index last year was 130 and this year it is 150.Which statement is correct?

The Five Foundations of Economics

Model Building and Gains From Trade

The Market at Work: Supply and Demand

Price Controls

The Efficiency of Markets and the Costs of Taxation

Introduction to Macroeconomics and Gross Domestic Product

Unemployment

Savings, interest Rates, and the Market for Loanable Funds

Financial Markets and Securities

Economic Growth and the Wealth of Nations

Growth Theory

The Aggregate Demandaggregate Supply Model

The Great Recession, the Great Depression, and Great Macroeconomic Debates

Federal Budgets: the Tools of Fiscal Policy

Fiscal Policy

Money and the Federal Reserve

Monetary Policy

International Trade

International Finance

Filters