Deck 5: Inflation and the Price Level

Question 1

A price index measures:

A)the price of specific good or service.
B)the change in the price of a specific good or service.
C)only the prices that change.
D)the average price of a given class of goods or services relative to the price of the same goods and services in a base year.

Answer 1

the average price of a given class of goods or services relative to the price of the same goods and services in a base year.

Question 2

A measure of the average price of a given class of goods or services relative to the price of the same goods and services in a base year is called a:

A)real price.
B)real quantity.
C)rate of inflation.
D)price index.

Answer 2

price index.

Question 3

The consumer price index for Planet Econ consists of only two items: books and hamburgers.In 2010, the base year, the typical consumer purchased 10 books for $25 each and 25 hamburgers for $2 each.In 2015, the typical consumer purchased 15 books for $30 each and 30 hamburgers for $3 each.The consumer price index for 2015 on Planet Econ equals:

A)1.00
B)1.15
C)1.25
D)1.45

Answer 3

1.25

Question 4

The CPI is a measure of the:

A)real wage.
B)price of a specific good or service.
C)rate of inflation.
D)average level of prices relative to prices in the base year.

Question 5

The CPI in year one equaled 1.45.The CPI in year two equaled 1.51.The rate of inflation between years one and two was ______ percent.

A)4.0
B)4.1
C)4.5
D)6.0

Question 6

A consumer expenditure survey reports the following information on entertainment spending: Using 2008 as the base year, by how much does a "cost of entertainment" index increase between 2008 and 2009?

A)3.9 percent
B)8.6 percent
C)13.4 percent
D)29.4 percent

Question 7

The inflation rate can be calculated as the percentage change in:

A)real GDP.
B)nominal GDP.
C)the CPI.
D)the exchange rate.

Question 8

The typical family on the Planet Econ consumes 10 pizzas, 7 pairs of jeans, and 20 gallons of milk.In 2008, pizzas cost $10 each, jeans cost $40 per pair, and milk cost $3 per gallon.In 2009, the price of pizzas increased to $14 each, while the price of jeans and milk remained the same.Between 2008 and 2009, a typical family's cost of living:

A)increased by 9 percent.
B)decreased by 9 percent.
C)remained the same.
D)increased by 40 percent.

Question 9

The typical family on the Planet Econ consumes 10 pizzas, 7 pairs of jeans, and 20 gallons of milk.In 2008, pizzas cost $10 each, jeans cost $40 per pair, and milk cost $3 per gallon.In 2009, the price of pizzas went down to $8 each, while the prices of jeans and milk remained the same.Between 2008 and 2009, a typical family's cost of living:

A)increased by 4.5 percent.
B)decreased by 4.5 percent.
C)remained the same.
D)decreased by 20 percent.

Question 10

A consumer expenditure survey reports the following information on consumer protein spending: Using 2005 as the base year, by how much does a "cost of protein" index increase between 2005 and 2006?

A)5.2 percent
B)8.6 percent
C)13.4 percent
D)14.3 percent

Question 11

Suppose that the total expenditures for a typical household in 2010 equaled $5,500 per month, while the cost of purchasing exactly the same items in 2015 was $6,875.If 2010 is the base year, the CPI for the year 2015 equals:

A)0.80
B)1.00
C)1.20
D)1.25

Question 12

The CPI in 1974 equaled 0.49.The CPI in 1975 equaled 0.54.The rate of inflation between 1974 and 1975 was ______ percent.

A)5.0
B)5.4
C)9.3
D)10.2

Question 13

The consumer price index measures the cost of:

A)a fixed basket of goods and services.
B)a changing basket of goods and services.
C)all goods and services purchased by consumers.
D)goods and services required to live above the poverty level.

Question 14

A CPI that equals 1.34 in 2008 (when 2000 is the base year) means that:

A)prices in 2008 are 34 percent higher than in 2007.
B)the CPI equals $1.34 in 2008.
C)the inflation rate in 2008 is 134 percent.
D)the average level of prices is 34 percent higher in 2008 than in the base year.

Question 15

The annual percentage rate of change in the price level is the:

A)relative price.
B)Fisher effect.
C)cost of living.
D)inflation rate.

Question 16

If the consumer price index increased from 1.52 to 1.65, then it must be the case that ______ relative to prices in the base year.

A)all prices rose
B)the weighted average level of prices rose
C)all prices fell
D)some prices rose and some prices fell

Question 17

The consumer price index for the current year measures the cost of a standard basket in the ______ year relative to the cost of the same basket in the ______ year.

A)current; base
B)current; current
C)base; index
D)base; current

Question 18

The measure of the cost of a standard basket of goods and services in any period relative to the cost of the same basket of goods and services in the base year is called the:

A)consumption cost calculator.
B)consumption production index.
C)consumer production index.
D)consumer price index.

Question 19

If the total expenditures of a typical family equaled $35,000 per year in 2010 and the exact same basket of goods and services cost $40,000 in the year 2015, the family's cost of living:

A)increased by 14 percent.
B)decreased by 12.5 percent.
C)decreased by 14 percent.
D)increased by 12.5 percent.

Question 20

Suppose that the total expenditures for a typical household in 2010equaled $2,500 per month, while the cost of purchasing exactly the same items in 2015 was $3,000.If 2010 is the base year, the CPI for 2010 equals:

A)0.83
B)1.00
C)1.20
D)1.25

Question 21

To correct a nominal quantity for changes in the price level, one should:

A)add a price index to it.
B)subtract a price index from it.
C)divide it by a price index.
D)multiply it by a price index.

Question 22

Inflation is a measure of the ______ of prices; the CPI is a measure of the ______ of prices.

A)current level; rate of change in the level
B)rate of change in the level; current level
C)index; base year's level
D)base year's level; index

Question 23

The ______ is the rate of increase of all prices except ______.

A)real rate of inflation; energy and food
B)core rate of inflation; energy and food
C)nominal rate of inflation; labor
D)core rate of inflation; interest rates

Question 24

A nominal value is measured:

A)in physical terms.
B)in terms of current dollar value.
C)using the consumer price index.
D)by indexing.

Question 25

A real quantity is a quantity measured:

A)in physical terms.
B)in terms of current dollar value.
C)by the average quantity.
D)using real prices.

Question 26

The CPI in 1931 equaled 0.15.The CPI in 1932 equaled 0.14.The rate of inflation between 1931 and 1932 was ______ percent.

A)-7.1
B)-6.7
C)1.4
D)6.7

Question 27

Over time, the core rate of inflation should be ______ than the general rate of inflation.

A)more stable
B)less stable
C)higher
D)less meaningful

Question 28

The core rate of inflation excludes food and energy prices because:

A)these prices don't change very frequently.
B)these prices are most frequently responsible for short-run fluctuations in the inflation rate.
C)consumers do not directly face these prices.
D)these prices do not matter to policymakers.

Question 29

The price of a gallon of gasoline at the pump increased by 10 percent at the same time that the inflation rate was 5 percent.The nominal price of gasoline _____, and the real price of gasoline _____.

A)increased; also increased
B)increased; decreased
C)increased; did not change
D)decreased; increased

Question 30

A measurement in terms of current dollar value is called a(n) ______ quantity.

A)nominal
B)real
C)deflated
D)indexed

Question 31

To compare the purchasing power of nominal wages in two different years, one must:

A)compare the nominal values.
B)deflate both quantities by a common price index.
C)increase both quantities by the same percentage increase in a price index.
D)adjust both quantities by the real interest rate.

Question 32

The situation when the price of most goods and services are falling over time is called:

A)inflation.
B)disinflation.
C)a boom.
D)deflation.

Question 33

In 1929, the CPI equaled 0.171 and in 1930, the CPI equaled 0.167.These data provide evidence of a period of:

A)inflation.
B)deflation.
C)trade deficit.
D)expansion.

Question 34

The ______ is the rate of change of the _______.

A)base year price index; current year price index
B)current year price index; base year price index
C)CPI; rate of inflation
D)rate of inflation; CPI

Question 35

Which of the following is a nominal quantity?

A)The number of people unemployed
B)The current price of a barrel of oil
C)The number of cars produced in 2005
D)The amount of coal mined in one month

Question 36

Which of the following is a real quantity?

A)The current wages paid to factory workers
B)The cost of a new car
C)The number of tons of steel produced in 2005
D)The current price of a barrel of oil

Question 37

Deflation is a situation in which the:

A)quantity of goods and services produced is increasing over time.
B)quantity of goods and services produced is decreasing over time.
C)prices of most goods and services are falling over time.
D)prices of most goods and services are rising over time.

Question 38

If the CPI equaled 1.43 in 2008and 1.56 in 2009, then between 2008 and 2009 there was:

A)inflation.
B)deflation
C)a recession
D)an expansion

Question 39

The CPI in 1930 equaled 0.17.The CPI in 1931 equaled 0.15.The rate of inflation between 1930 and 1931 was ______ percent.

A)-13.3
B)-11.8
C)1.5
D)11.8

Question 40

All of the following are real quantities except the:

A)number of new cars produced in one year.
B)tons of steel shipped to South America.
C)millions of computer chips shipped to computer makers.
D)billions of dollars invested in stocks.

Question 41

One family earned an income of $28,000 in 1990.Over the next five years, their income increased by 15%, while the CPI increased by 15%.After five years, this family's nominal income ______, and their real income ______.

A)decreased; also decreased
B)decreased; increased
C)increased; did not change
D)increased; also increased

Question 42

If you wish to maintain a constant purchasing power when you retire, you should choose retirement income options that are:

A)deflated.
B)nominal.
C)indexed.
D)inflateD.Indexing keeps wages and prices increasing at the same rate as inflation.

Question 43

A college graduate in 1972 found a job paying $7,200.The CPI was 0.418 in 1972.A college graduate in 2005 found a job paying $30,000.The CPI was 1.68 in 2005.The 1972 graduate's job paid ______ in nominal terms and ______ in real terms than the 2005 graduate's job.

A)more; less
B)more; more
C)less; more
D)less, less

Question 44

A factory worker earned $10 an hour in 1980.The CPI was 0.82 in 1980.The same factory worker was earning $15 an hour in 1990 when the CPI was 1.31.From 1980 to 1990, the factory worker's hourly real wage:

A)increased from $7.63 to $18.29.
B)decreased from $12.20 to $11.45.
C)remained constant.
D)increased from $10 to $15

Question 45

Because the minimum wage is not indexed to inflation, when there is inflation the nominal minimum wage _____, and the real minimum wage _____.

A)remains constant; decreases
B)remains constant; remains constant
C)decreases; remains constant
D)increases; decreases

Question 46

A college graduate in 1972 found a job paying $7,200.The CPI was 0.418 in 1972.A college graduate in 2005 found a job paying $28,000.The CPI was 1.68 in 2005.The 1972 graduate's job paid ______ in nominal terms and ______ in real terms than the 2005 graduate's job.

A)more; less
B)more; more
C)less; more
D)less, less

Question 47

The CPI equals 1.00 in year one and 1.15 in year two.If the nominal wage is $15 in year one and a contract calls for the wage to be indexed to the CPI, what will be the nominal wage in year two?

A)$15.00
B)$16.15
C)$17.25
D)$22.50

Question 48

The price of a gallon of gasoline at the pump increased by 10 percent at the same time that the inflation rate was 15 percent.The nominal price of gasoline _____, and the real price of gasoline _____.

A)increased; also increased
B)increased; decreased
C)increased; did not change
D)decreased; increased

Question 49

Indexing is the process of:

A)dividing a real quantity by a price index.
B)dividing a nominal quantity by a price index.
C)increasing a nominal quantity by an amount equal to the percentage change in a price index.
D)increasing a real quantity by an amount equal to the percentage change in a price index.

Question 50

If workers received a 5 percent wage increase and the rate of inflation was 10 percent, then their real wage:

A)increased.
B)decreased.
C)remained constant.
D)equaled the nominal wage.

Question 51

The price of a gallon of gasoline was $0.35 in 1972 when the CPI equaled 0.418.The cost of a gallon of gasoline was $2.25 in 2005 when the CPI equaled 1.68.The real cost of a gallon of gasoline between 1972 and 2005:

A)increased.
B)decreased.
C)remained constant.
D)may have either increased or decreaseD.The real cost of gasoline increased from $.84 per gallon ($0.35 / 0.418) in 1972 to $1.34 ($2.25 / 1.68) in 2005.

Question 52

If workers received a 5 percent wage increase and the rate of inflation was 3 percent, then their real wage:

A)increased.
B)decreased.
C)remained constant.
D)equaled the nominal wage.

Question 53

A labor contract provides for a first-year wage of $10 per hour, and specifies that the real wage will rise by 3 percent in the second year of the contract.The CPI is 1.00 in the first year and 1.07 in the second year.What dollar wage must be paid in the second year?

A)$10.30
B)$10.70
C)$10.90
D)$11.02

Question 54

One family earned an income of $28,000 in 1990.Over the next five years, their income increased by 15%, while the CPI increased by 12%.After five years, this family's nominal income ______, and their real income ______.

A)decreased; also decreased
B)decreased; increased
C)increased; did not change
D)increased; also increased

Question 55

The practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index is called:

A)a substitution bias.
B)the Fisher effect.
C)deflating.
D)indexing.

Question 56

A report indicated that the average real wage in manufacturing declined by 2% between 1990 and 2000.If the CPI equaled 1.30 in 1990, 1.69 in 2000, and the average nominal wage in manufacturing was $35 in 2000, what was the average nominal wage in manufacturing in 1990?

A)$21.13
B)$26.40
C)$26.92
D)$27.47

Question 57

The wage paid to workers measured in terms of real purchasing power is called the:

A)nominal wage.
B)cost of living.
C)minimum wage.
D)real wage.

Question 58

The real wage is the wage:

A)measured in current dollars.
B)required to maintain a minimum standard of living.
C)employers are required to pay workers.
D)measured in terms of purchasing power.

Question 59

A labor contract provides for a first-year wage of $15 per hour, and specifies that the real wage will rise by 2 percent in the second year of the contract.The CPI is 1.00 in the first year and 1.09 in the second year.What dollar wage must be paid in the second year?

A)$15.30
B)$16.09
C)$16.45
D)$16.68

Question 60

The price of a gallon of gasoline at the pump increased by 5 percent at the same time that the inflation rate was also 5 percent.The nominal price of gasoline _____, and the real price of gasoline _____.

A)did not change; increased
B)did not change; did not change
C)increased; did not change
D)increased; decreased

Question 61

Suppose that the price of chicken rises sharply compared to the price of turkey.In response, consumers buy more turkey and less chicken than they did in the CPI base year.In this situation the CPI will tend to ______ inflation as a result of ______ bias.

A)overstate; substitution
B)understate; substitution
C)accurately measure; substitution
D)overstate; quality adjustment

Question 62

The price level is:

A)the rate of inflation.
B)a measure of overall prices at a particular point in time.
C)the percentage change in a price index such as the CPI.
D)the price of a specific good in comparison to the prices of other goods and services.The price level is a measure of overall prices at a particular point in time.

Question 63

A labor contract provides for a first-year wage of $10 per hour, and specifies that the real wage will rise by 3 percent in the second year of the contract and by another 3 percent in the third year.The CPI is 1.00 in the first year, 1.07 in the second year, and 1.15 in the third year.What dollar wage must be paid in the third year?

A)$10.61
B)$11.15
C)$12.20
D)$12.31

Question 64

If the official CPI inflation rate is 4%, the "true" rate of inflation may be closer to ______ according to the findings of the Boskin Commission.

A)-4%
B)0%
C)2%
D)6%

Question 65

The substitution bias in the CPI refers to the failure of statisticians to:

A)allow for the possibility that consumers switch from products whose prices are rising.
B)allow for the possibility that consumers switch stores at which they shop.
C)take into account improvements in goods and services.
D)take into account new products purchased by consumers.

Question 66

A relative price is:

A)the rate of inflation.
B)a measure of overall prices at a particular point in time.
C)the percentage change in a price index such as the CPI.
D)the price of a specific good in comparison to the prices of other goods and services.

Question 67

Two types of bias that tend to cause the CPI to overstate the "true" rate of inflation are the ______ bias and the ______ bias.

A)substitution; quality adjustment
B)price; quantity
C)aggregation; price
D)quality adjustment; price adjustment

Question 68

When statisticians fail to take into account improvements in the quality of goods and services, the CPI will tend to ______ the rate of inflation.

A)understate
B)precisely measure
C)be unrelated to
D)overstate

Question 69

The Boskin Commission found that the CPI ______ the true inflation rate.

A)is independent of
B)understates
C)precisely measures
D)overstates

Question 70

Product improvements make it difficult for the statisticians who construct the CPI to distinguish between ______ changes and ______ changes.

A)price; quality
B)quantity; price
C)quantity; quality
D)income; price

Question 71

If the Boskin Commission's conclusion is correct, then the CPI ______ the "true" inflation and improvements in living standards over time has been _____.

A)understates; overestimated
B)understates; underestimated
C)overstates; underestimated
D)measures; overestimated

Question 72

Two methods used to adjust nominal values for inflation are:

A)substituting and complementing.
B)indexing and deflating.
C)aggregating and disaggregating.
D)real and nominal.

Question 73

To ensure that a nominal payment represents a constant level of purchasing power over time, one should:

A)add the price index to it.
B)subtract the price index from it.
C)divide it by the price index.
D)increase it by a percentage equal to the rate of inflation for that year.

Question 74

Suppose the CPI does indeed overstate the inflation rate.When the CPI increases by 5% and household incomes increase by 5%, we should conclude that real incomes of households have:

A)increased.
B)stayed constant.
C)decreased.
D)increased more slowly than has inflation.

Question 75

Suppose manufacturers introduce a new model car to replace a car currently included in the CPI basket.The price of the new car is 10 percent higher than the discontinued model, but the new car has additional safety features and amenities.In this situation the CPI will tend to ______ inflation as a result of ______ bias.

A)overstate; substitution
B)understate; quality adjustment
C)accurately measure; substitution
D)overstate; quality adjustment

Question 76

The substitution bias in the CPI arises because the CPI:

A)is based on a fixed basket of goods and services.
B)does not adequately allow for improvements in products.
C)measures prices at two different times.
D)understates the "true" rate of inflation.

Question 77

When consumers substitute a cheaper good for a more expensive one, the CPI will ______ the change in the cost of living.

A)equal
B)understate
C)precisely measure
D)overstate

Question 78

The quality adjustment bias of the CPI refers to the failure of statisticians to:

A)allow for the possibility that consumers switch from products whose prices are rising.
B)allow for the possibility that consumers switch stores at which they shop.
C)take into account improvements in goods and services.
D)take into account price changes in goods and services.

Question 79

When statisticians fail to allow for the possibility that consumers switch from products with rising prices to those whose prices are stable or falling, the CPI will tend to ______ the rate of inflation.

A)understate
B)precisely measure
C)be unrelated to
D)overstate

Question 80

If the Boskin Commission's conclusion is correct, then the CPI ______ the "true" inflation rate and indexing Social Security benefits to the CPI is ______ the federal government billions of dollars.

A)understates; costing
B)overstates; costing
C)understates; saving
D)measures; saving