Question 1

Describe the methodology of finding the consumer price index (CPI).

Accepted Answer

The prices of 8,000 goods are measured i

Question 2

Let's say a bottle of Dr. Wells (an actual soft drink still available but hard to obtain) cost $0.15 in 1970. If the consumer price index (CPI) in 1970 was 37.8 and the current CPI is 240, then the inflation-adjusted price of Dr. Wells would be (rounded to the nearest penny):

Accepted Answer

A)  $0.0236. 
B)  $2.36. 
C)  about a dollar. 
D)  $0.95 
E)  $95.00. 
A)  $0.0236. 
B)  $2.36. 
C)  about a dollar. 
D)  $0.95 
E)  $95.00.

Question 3

You are offered two jobs, one in Richmond, Virginia, paying $67,000, and one in San Diego, California, paying $79,000. The price index in Richmond is 104.5, and in San Diego it is 132.3. 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 Richmond because the real wage is higher there. 
C)  you would definitely take the job in San Diego because the real wage is higher there. 
D)  you would likely take the job in Richmond because there is a Federal Reserve bank there and it would control inflation in the area. 
E)  better weather is directly correlated to real wages; hence you would likely take the job in San Diego. 
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 Richmond because the real wage is higher there. 
C)  you would definitely take the job in San Diego because the real wage is higher there. 
D)  you would likely take the job in Richmond because there is a Federal Reserve bank there and it would control inflation in the area. 
E)  better weather is directly correlated to real wages; hence you would likely take the job in San Diego.

Question 4

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 chickens 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 chickens 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 5

Suppose that the consumer price index of a country was 160 at Year X and 164 at the end of Year Y. What was the country's inflation rate during Year Y?

Accepted Answer

A)  5% 
B)  2.5% 
C)  64% 
D)  164% 
E)  32% 
A)  5% 
B)  2.5% 
C)  64% 
D)  164% 
E)  32%

Question 6

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 7

Milton Friedman, who won the Nobel Prize in Economics, characterized inflation as being "high and variable." These characteristics of inflation create problems because:

Accepted Answer

A)  of future price uncertainty. 
B)  of arbitrage. 
C)  of the signal emissions problem. 
D)  deflation could occur. 
E)  inflation always becomes hyperinflation. 
A)  of future price uncertainty. 
B)  of arbitrage. 
C)  of the signal emissions problem. 
D)  deflation could occur. 
E)  inflation always becomes hyperinflation.

Question 8

If people bought the same market basket of goods as the average consumer again and again:

Accepted Answer

A)  the consumer price index (CPI) would be extremely accurate. 
B)  the CPI would be less accurate. 
C)  the gross domestic product (GDP) deflator would be more accurate. 
D)  the GDP deflator would be less accurate. 
E)  the CPI would be biased upward relative to the GDP deflator. 
A)  the consumer price index (CPI) would be extremely accurate. 
B)  the CPI would be less accurate. 
C)  the gross domestic product (GDP) deflator would be more accurate. 
D)  the GDP deflator would be less accurate. 
E)  the CPI would be biased upward relative to the GDP deflator.

Question 9

In Bovania, milk constitutes 56% of the typical basket of goods for a typical consumer. Let's say the price of milk rises by 7% and the prices of all other goods fall by 4%. Based on the information given, we can definitely say:

Accepted Answer

A)  the consumer price index (CPI) in Bovania is greater than in the previous year. 
B)  the CPI in Bovania is less than in the previous year. 
C)  if consumers get a 4% pay raise, they are worse off in terms of their real income compared to inflation as measured by the Bovanian CPI. 
D)  the gross domestic product (GDP) deflator must be higher than the CPI. 
E)  the GDP deflator must be less than the CPI. 
A)  the consumer price index (CPI) in Bovania is greater than in the previous year. 
B)  the CPI in Bovania is less than in the previous year. 
C)  if consumers get a 4% pay raise, they are worse off in terms of their real income compared to inflation as measured by the Bovanian CPI. 
D)  the gross domestic product (GDP) deflator must be higher than the CPI. 
E)  the GDP deflator must be less than the CPI.

Question 10

To convert a current price of a product to its price in the past, we would take the current price of a product and:

Accepted Answer

A)  divide by the current price index and then add the previous price index. 
B)  multiply by the ratio of the current price index to the previous price index. 
C)  multiply by the ratio of the previous price index to the current price index. 
D)  divide by the ratio of the previous price index to the current price index. 
E)  average the chain-weighted consumer price index (CPI) and the traditional CPI of the previous year, and then multiply the current price by the average of the two. 
A)  divide by the current price index and then add the previous price index. 
B)  multiply by the ratio of the current price index to the previous price index. 
C)  multiply by the ratio of the previous price index to the current price index. 
D)  divide by the ratio of the previous price index to the current price index. 
E)  average the chain-weighted consumer price index (CPI) and the traditional CPI of the previous year, and then multiply the current price by the average of the two.

Question 11

What is the consumer price index (CPI)?

Accepted Answer

A)  The CPI is the measure of consumer prices in both rural and urban areas. It is calculated by adding up all prices. 
B)  The CPI is a measure of the price level based on the consumption patterns of a typical consumer. 
C)  The CPI is a measure of all prices in the economy. 
D)  The CPI is a measure of food prices, because food is what is consumed. 
E)  The CPI is a measure of food, clothing, and housing prices. 
A)  The CPI is the measure of consumer prices in both rural and urban areas. It is calculated by adding up all prices. 
B)  The CPI is a measure of the price level based on the consumption patterns of a typical consumer. 
C)  The CPI is a measure of all prices in the economy. 
D)  The CPI is a measure of food prices, because food is what is consumed. 
E)  The CPI is a measure of food, clothing, and housing prices.

Question 12

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 13

In Las Vegas, the cost of living index is 110, and in San Francisco, it is 170. You work in Las Vegas currently and your salary is $57,000. You are offered a promotion and pay raise of $70,000 to move to San Francisco. If you take the promotion:

Accepted Answer

A)  your nominal wage and your real wage have increased. 
B)  your nominal wage increased but your real wage has decreased. 
C)  your nominal wage decreased but your real wage has increased. 
D)  both your nominal and real wage have decreased. 
E)  your real wage remained constant even though your nominal wage rose. 
A)  your nominal wage and your real wage have increased. 
B)  your nominal wage increased but your real wage has decreased. 
C)  your nominal wage decreased but your real wage has increased. 
D)  both your nominal and real wage have decreased. 
E)  your real wage remained constant even though your nominal wage rose.

Question 14

Let's say a company invents a very popular device called a Zorgon, which allows you to send small items via a transporter from one place to another. This would affect the consumer price index (CPI) in the sense that the CPI:

Accepted Answer

A)  would fail to include purchases of the Zorgon for some period of time after the product entered the market. 
B)  would overstate the cost of the Zorgon because the price would fall over time but the CPI would always be "catching up" and be behind the price decreases. 
C)  would fail to take into account substitution between the Zorgon and the use of shipping services such as FedEx and UPS as the relative price of these changed. 
D)  would fail to take into account the quality of the Zorgon. 
E)  always accurately measures the cost of living. 
A)  would fail to include purchases of the Zorgon for some period of time after the product entered the market. 
B)  would overstate the cost of the Zorgon because the price would fall over time but the CPI would always be "catching up" and be behind the price decreases. 
C)  would fail to take into account substitution between the Zorgon and the use of shipping services such as FedEx and UPS as the relative price of these changed. 
D)  would fail to take into account the quality of the Zorgon. 
E)  always accurately measures the cost of living.

Question 15

Refer to the following figure when answering the next questions:  
-Based on the figure, and if we define inflation as being "under control" at rates less than 10%, when was inflation under control?

Accepted Answer

A)  1996-2002 only 
B)  1997-2003 and 2005-2011 
C)  2005-2011 only 
D)  1996-1997 only 
E)  It was never under control. 
A)  1996-2002 only 
B)  1997-2003 and 2005-2011 
C)  2005-2011 only 
D)  1996-1997 only 
E)  It was never under control.

Question 16

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 17

The textbook shows that the inflation-adjusted movie receipts for Star Wars (released 1977) were $1,410,707,000 and the original receipts were $460,998,000. The implication is that:

Accepted Answer

A)  prices in the current year are about the same as they were in 1977. 
B)  hyperinflation has occurred since 1977. 
C)  prices today are about 33% of what they were in 1977. 
D)  prices today are about three times what they were in 1977. 
E)  Star Wars was a bad movie at the time of its release but has become more popular over time. 
A)  prices in the current year are about the same as they were in 1977. 
B)  hyperinflation has occurred since 1977. 
C)  prices today are about 33% of what they were in 1977. 
D)  prices today are about three times what they were in 1977. 
E)  Star Wars was a bad movie at the time of its release but has become more popular over time.

Question 18

If the price of a typical market basket of goods increased from about $20 in 1960 to $200 in early 2012, then it:

Accepted Answer

A)  must not have contained the same goods in both periods. 
B)  rose at a 100% rate from 1960 until early 2012. 
C)  rose at a 10% rate per year from 1960 until early 2012. 
D)  rose by 10-fold from 1960 until early 2012. 
E)  rose by 40-fold from 1960 until early 2012. 
A)  must not have contained the same goods in both periods. 
B)  rose at a 100% rate from 1960 until early 2012. 
C)  rose at a 10% rate per year from 1960 until early 2012. 
D)  rose by 10-fold from 1960 until early 2012. 
E)  rose by 40-fold from 1960 until early 2012.

Question 19

Explain the notion of money illusion in specific detail.

Accepted Answer

Money illusion is when people notice the

Question 20

Deflation:

Accepted Answer

A)  automatically implies that, on average, everyone is better off because prices have fallen. 
B)  would negatively affect producers but positively affect consumers because producers must accept lower prices. 
C)  might easily make both producers and consumers better off because consumers might lose jobs due to falling prices and profit margins, and the falling profit margins would negatively impact producers. 
D)  might make you better off if your nominal wages fall more rapidly than prices. 
E)  automatically occurs when there are more goods with falling prices than there are goods with increasing prices. 
A)  automatically implies that, on average, everyone is better off because prices have fallen. 
B)  would negatively affect producers but positively affect consumers because producers must accept lower prices. 
C)  might easily make both producers and consumers better off because consumers might lose jobs due to falling prices and profit margins, and the falling profit margins would negatively impact producers. 
D)  might make you better off if your nominal wages fall more rapidly than prices. 
E)  automatically occurs when there are more goods with falling prices than there are goods with increasing prices.

Describe the methodology of finding the consumer price index (CPI).

Let's say a bottle of Dr. Wells (an actual soft drink still available but hard to obtain) cost $0.15 in 1970. If the consumer price index (CPI) in 1970 was 37.8 and the current CPI is 240, then the inflation-adjusted price of Dr. Wells would be (rounded to the nearest penny):

You are offered two jobs, one in Richmond, Virginia, paying $67,000, and one in San Diego, California, paying $79,000. The price index in Richmond is 104.5, and in San Diego it is 132.3. If real wages are the only consideration, then:

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

Suppose that the consumer price index of a country was 160 at Year X and 164 at the end of Year Y. What was the country's inflation rate during Year Y?

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

Milton Friedman, who won the Nobel Prize in Economics, characterized inflation as being "high and variable." These characteristics of inflation create problems because:

If people bought the same market basket of goods as the average consumer again and again:

In Bovania, milk constitutes 56% of the typical basket of goods for a typical consumer. Let's say the price of milk rises by 7% and the prices of all other goods fall by 4%. Based on the information given, we can definitely say:

To convert a current price of a product to its price in the past, we would take the current price of a product and:

What is the consumer price index (CPI)?

The housing crisis has some roots in inflation because:

In Las Vegas, the cost of living index is 110, and in San Francisco, it is 170. You work in Las Vegas currently and your salary is $57,000. You are offered a promotion and pay raise of $70,000 to move to San Francisco. If you take the promotion:

Let's say a company invents a very popular device called a Zorgon, which allows you to send small items via a transporter from one place to another. This would affect the consumer price index (CPI) in the sense that the CPI:

Refer to the following figure when answering the next questions: -Based on the figure, and if we define inflation as being "under control" at rates less than 10%, when was inflation under control?

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:

The textbook shows that the inflation-adjusted movie receipts for Star Wars (released 1977) were $1,410,707,000 and the original receipts were $460,998,000. The implication is that:

If the price of a typical market basket of goods increased from about $20 in 1960 to $200 in early 2012, then it:

Explain the notion of money illusion in specific detail.

Deflation:

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

Exam 8: The Price Level and Inflation

Describe the methodology of finding the consumer price index (CPI).

Let's say a bottle of Dr. Wells (an actual soft drink still available but hard to obtain) cost $0.15 in 1970. If the consumer price index (CPI) in 1970 was 37.8 and the current CPI is 240, then the inflation-adjusted price of Dr. Wells would be (rounded to the nearest penny):

You are offered two jobs, one in Richmond, Virginia, paying $67,000, and one in San Diego, California, paying $79,000. The price index in Richmond is 104.5, and in San Diego it is 132.3. If real wages are the only consideration, then:

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

Suppose that the consumer price index of a country was 160 at Year X and 164 at the end of Year Y. What was the country's inflation rate during Year Y?

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

Milton Friedman, who won the Nobel Prize in Economics, characterized inflation as being "high and variable." These characteristics of inflation create problems because:

If people bought the same market basket of goods as the average consumer again and again:

In Bovania, milk constitutes 56% of the typical basket of goods for a typical consumer. Let's say the price of milk rises by 7% and the prices of all other goods fall by 4%. Based on the information given, we can definitely say:

To convert a current price of a product to its price in the past, we would take the current price of a product and:

What is the consumer price index (CPI)?

The housing crisis has some roots in inflation because:

In Las Vegas, the cost of living index is 110, and in San Francisco, it is 170. You work in Las Vegas currently and your salary is $57,000. You are offered a promotion and pay raise of $70,000 to move to San Francisco. If you take the promotion:

Let's say a company invents a very popular device called a Zorgon, which allows you to send small items via a transporter from one place to another. This would affect the consumer price index (CPI) in the sense that the CPI:

Refer to the following figure when answering the next questions: -Based on the figure, and if we define inflation as being "under control" at rates less than 10%, when was inflation under control?

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:

The textbook shows that the inflation-adjusted movie receipts for Star Wars (released 1977) were $1,410,707,000 and the original receipts were $460,998,000. The implication is that:

If the price of a typical market basket of goods increased from about $20 in 1960 to $200 in early 2012, then it:

Explain the notion of money illusion in specific detail.

Deflation:

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