Question 1

Based on the weight of the consumer price index (CPI),the price of rental housing increases by 15% and that of owned housing by 5%.During the same year,the price of gasoline falls by 22%.We can say that:

Accepted Answer

A)  the CPI would definitely fall during the year in question. 
B)  the CPI would definitely rise during the year in question. 
C)  all other factors being constant, it is likely the CPI would rise during the year in question. 
D)  all other factors being constant, it is likely the CPI would fall during the year in question. 
E)  all other factors being constant, the CPI would change by about 6% because that is the average housing change plus the average gasoline change.

Question 2

Typically the consumer price index (CPI) is calculated by:

Accepted Answer

A)  checking the prices of all goods in 38 geographic locations. 
B)  checking the prices of only consumer goods in all populated places in the United States (using the Census Bureau's definition of a populated place). 
C)  checking the prices of about 8,000 goods in about 38 locations across the United States. 
D)  checking the prices of about 8,000 goods in about 38 locations in North America. 
E)  checking the prices of about 10,000 goods in about 75 locations in the United States.

Question 3

Your firm expands its output in a time when demand appears to be increasing.Demand for all goods is increasing because of inflation,and consumers want to buy all goods faster because their real purchasing power is falling due to inflation.This situation could indicate that:

Accepted Answer

A)  your firm experienced future price uncertainty. 
B)  your firm experienced menu costs. 
C)  your firm experienced money illusion. 
D)  your firm experienced deflation. 
E)  your firm experienced a price confusion problem.

Question 4

Refer to the following figure to answer the next four questions:
 
-As presented in the figure,one could correctly state that:

Accepted Answer

A)  U.S.inflation and E.U.inflation were directly related, but E.U.inflation was generally more than U.S.inflation. 
B)  U.S.inflation and E.U.inflation were inversely related, but E.U.inflation was generally more than U.S.inflation. 
C)  U.S.inflation and E.U.inflation were directly related, but U.S.inflation was generally more than E.U.inflation. 
D)  U.S.inflation and E.U.inflation were inversely related, but U.S.inflation was generally more than E.U.inflation. 
E)  Both the United States and the European Union experienced deflation from about mid-1980 until about mid-1986.

Question 5

If cheeseburgers become more expensive and consumers switch their purchases away from cheeseburgers but the consumer price index (CPI) still assumes they buy the same amount,then:

Accepted Answer

A)  the CPI will reflect upward bias. 
B)  the CPI will reflect downward bias. 
C)  consumers will experience money illusion. 
D)  consumers will experience a price confusion problem. 
E)  deflation will occur because consumers no longer buy cheeseburgers.

Question 6

Assume tuition at the University of Virginia cost $2,962 (per semester) in 2004 and $11,584 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 much more rapidly than inflation. 
C)  tuition has increased at about the same rate as inflation. 
D)  nominal tuition has decreased. 
E)  tuition suffers from menu costs due to inflation.

Question 7

According to the consumer price index (CPI),in a particular year,the price of gasoline rises in the United States by 22%; simultaneously,the price of all food items falls by 8%.Which statement is correct?

Accepted Answer

A)  If gasoline prices rise in more of the 38 geographical locations than those in which it stays the same or falls, the food price changes are irrelevant. 
B)  This means that the price of gasoline must have increased in more of the 38 geographical locations where the CPI is measured and food prices must have fallen in more of those 38 locations. 
C)  Based solely on the information given, we cannot conclude what happened to the CPI. 
D)  This means that the price of gasoline and food rose in every geographic location where the CPI is measured. 
E)  This means that the price of gasoline and food rose in every place where gasoline and food are sold in the United States during that year.

Question 8

How do you convert a price of a good from an earlier time into today's price?

Accepted Answer

A)  Take the earlier price and divide by today's price, then multiply by the ratio of the consumer price index (CPI) today to that of the CPI in the old year. 
B)  Take the earlier price and multiply by the ratio of the earlier gross domestic product (GDP) deflator to today's CPI. 
C)  Take today's price and divide by the earlier price in terms of the GDP deflator. 
D)  Take the earlier price and multiply by the ratio of today's CPI to the earlier CPI. 
E)  Take the earlier price and multiply by the ratio of the earlier CPI to the current CPI.

Question 9

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.

Question 10

In Bovania,cattle compose 48% of the consumer price index (CPI),housing composes 32%,and entertainment accounts for the remaining 20%.If,in a certain year,the price of cattle rises by 30% and the price of housing rises by 25%,then:

Accepted Answer

A)  the value of the CPI must rise, no matter what happens to the price of entertainment because two-thirds of the CPI is more expensive. 
B)  the CPI has increased as long as the price of entertainment does not fall by more than 55%. 
C)  the CPI has increased, even if the entertainment in the next year is free. 
D)  the CPI has decreased if the price of entertainment falls by more than 27.5%. 
E)  it is not possible to tell what would happen to the CPI because it is certain that the goods included in the CPI must change.

Question 11

Inflation necessarily occurs when:

Accepted Answer

A)  the price of gasoline rises. 
B)  a greater number of goods increase in price compared to the number of goods that undergo a price decrease. 
C)  the overall price level, such as the consumer price index (CPI), rises. 
D)  there is an increase in the rate of change in the price level. 
E)  the price of at least one good, but possibly more than one good, in the economy increases.

Question 12

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.

Question 13

The website that provides official inflation statistics is:

Accepted Answer

A)  www.econstats.com. 
B)  www.bls.gov. 
C)  www.bea.gov. 
D)  www.inflation.gov. 
E)  www.econometrics.com.

Question 14

According to the March 2012 consumer price index (CPI),the top three consumer expenditure categories are,respectively:

Accepted Answer

A)  housing, transportation, and entertainment. 
B)  transportation, housing, and energy. 
C)  housing, medical care, and food and beverages. 
D)  transportation, housing, and medical care. 
E)  housing, transportation, and food and beverages.

Question 15

You own a store and have not raised prices recently-and now your store has more customers.Which statement is correct?

Accepted Answer

A)  This can be troublesome because you face a "menu costs" problem because you must not have increased prices fast enough. 
B)  This can be troublesome because you face a price confusion problem: You don't know if the extra business means that you should open another store, or if the crowds are a result of inflation, which has caused all consumers to buy at a faster rate. 
C)  This can be troublesome because you face a future price uncertainty problem because you don't know how much to increase your prices now or in the future. 
D)  It can't be troublesome; it can only be good. 
E)  This can be troublesome because too many customers generate deflationary pressures for all businesses.

Question 16

Inflation can create uncertainty by making:

Accepted Answer

A)  the real value of past payments uncertain. 
B)  the nominal value of past payments uncertain. 
C)  the real value of future payments uncertain. 
D)  the nominal value of future payments uncertain. 
E)  wages unstable.

Question 17

Donna Newton made $0.30 per hour in 1946 at a small restaurant in Clearfield,Pennsylvania.If the consumer price index (CPI) was 18.3 in 1946 and 202.4 in 2011,then Donna's inflation-adjusted wage would be:

Accepted Answer

A)  $7.25 by U.S.law. 
B)  $0.30. 
C)  $2.87. 
D)  $0.61. 
E)  $3.32.

Question 18

Inflation creates uncertainty because:

Accepted Answer

A)  nominal values of prices and wages are unknown. 
B)  it rapidly increases output. 
C)  real interest rates, prices, and wages are unknown. 
D)  borrowing continues at a rapid pace, creating a "false boom." 
E)  although price confusion problems are eliminated, the shoe-leather costs are exacerbated.

Question 19

If Robert was earning $10,000 and now earns $11,500,then:

Accepted Answer

A)  Robert's real income must have risen. 
B)  Robert's real wage has increased, but we can't tell about his nominal wage. 
C)  Robert could suffer from money illusion if prices increase by 15% or more. 
D)  Robert could experience menu costs if the items on the "value menu" increase in price. 
E)  Robert will be confused about relative price increases and inflation.

Question 20

In terms of inflation,the period from the mid-1980s until today in the United States is called the "Great Moderation." This refers to the fact that:

Accepted Answer

A)  the hyperinflation rates of 100% or more experienced during the 1960s, 1970s, and 1980s have been replaced by moderate rates of inflation averaging about 12%. 
B)  the inflation of the 1960s, 1970s, and early 1980s has been replaced by deflation. 
C)  the deflation of the 1960s, 1970s, and early 1980s has been replaced by moderate inflation (under 10%). 
D)  the double-digit inflation of the 1970s and 1980s has been replaced by well-controlled inflation of less than 10%. 
E)  inflation now fluctuates between 0% and 20%, whereas in the 1970s and 1980s, it fluctuated more wildly and at higher rates.

Exam 8: The Price Level and Inflation

Based on the weight of the consumer price index (CPI) ,the price of rental housing increases by 15% and that of owned housing by 5%.During the same year,the price of gasoline falls by 22%.We can say that: