Chapter 23 Measuring the Cost of Living

Test A
1

When the consumer price index rises, a typical family a. can spend fewer dollars to maintain the same standard of living. b. finds that its standard of living is not affected. c. has to spend more dollars to maintain the same standard of living. d. None of the above answers is necessarily correct. ANSWE ! c. has to spend more dollars to maintain the same standard of living. "#$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
.

"he inflation rate is defined as the a. cost of inflation. b. cost of borrowing. c. percentage change in real /'$ from the previous period. d. percentage change in the price level from the previous period. ANSWE ! d. percentage change in the price level from the previous period. "#$E! % &E#1! ' SE(")*N! )N" *+,E(")-E! AN'*%! #
0

"he ($) is a measure of the overall cost of a. producer inputs. b. personal imports. c. goods and services bought by a typical consumer. d. goods and services produced in the economy. ANSWE ! c. goods and services bought by a typical consumer. "#$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
1

"he ($) is computed using all goods and services a. produced in the economy. b. used to produce other goods. c. that typical producers buy. d. that typical consumers buy. ANSWE ! d. that typical consumers buy. "#$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
2

)n computing the ($), the base year is the a. year against which this years price index is compared to find the inflation rate during the year. b. benchmar3 against which other years are compared. c. current year. d. year with the lowest prices. ANSWE ! b. benchmar3 against which other years are compared. "#$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 1 AN'*%! #

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9or any given year, the ($) is the price of the bas3et of goods and services in the a. given year divided by the price of the bas3et in the base year, then multiplied by 1::. b. base year divided by the price of the bas3et in the base year, then divided by 1::. c. base year divided by the price of the bas3et in the given year, then divided by 1::. d. base year divided by the price of the bas3et in the given year, then multiplied by 1::. ANSWE ! a. given year divided by the price of the bas3et in the base year, then multiplied by 1::. "#$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
;

(ategories of <.S. consumer spending used in the ($), ran3ed from largest to smallest are! a. food and beverages, housing, and medical care. b. food and beverages, medical care, and housing. c. housing, food and beverages, and medical care. d. housing, medical care, and food and beverages. ANSWE ! c. housing, food and beverages, and medical care. "#$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
=

Substitution causes the increase in the cost of living from one year to the next to be a. neither overstated or understated by the ($) because the ($) is based on the price of all goods. b. overstated by the ($) because the bas3et of goods used to compute the ($) changes from year to year and so does not ta3e into account the fact that as prices rise people purchase more of the goods they li3e less. c. understated by the ($) because the ($) changes from year to year and so does not ta3e into account the fact that people substitute higher >uality goods for lower >uality ones as income increases. d. overstated by the ($) because the ($) is based on a fixed bas3et of goods that does not reflect increases in the purchases of goods that become relatively cheap. ANSWE ! d. overstated by the ($) because the ($) is based on a fixed bas3et of goods that does not reflect increases in the purchases of goods that become relatively cheap. "#$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! . AN'*%! #
?

<nmeasured >uality change is a problem in the ($) because a. if the >uality of a good deteriorates, the purchasing power of a dollar increases even if the price of the good remains the same. b. the +ureau of 7abor Statistics does not attempt to account for any >uality changes that affect the standard of living. c. if the >uality of a good improves, the purchasing power of a dollar increases even if the price of the good remains the same. d. +oth a and b are correct. ANSWE ! c. if the >uality of a good improves, the purchasing power of a dollar increases even if the price of the good remains the same. "#$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! . AN'*%! #
1:

Which of the following statements best represents economists@ beliefs about the bias in the ($) as a measure of the cost of livingA a. Economists agree on the severity of the ($) bias, but there is still debate on what to do about it. b. Economists debate both the severity of the ($) bias and what to do about it. c. Economists agree that the bias in the ($) is a very serious problem. d. Economists agree that the bias in the ($) is not a serious problem. ANSWE ! b. Economists debate both the severity of the ($) bias and what to do about it. "#$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! . AN'*%! #

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%ost, but not all, soccer balls used in the <nited States are imported from other nations. )f the price of soccer balls increases, the /'$ deflator will a. increase, but the consumer price index will not increase. b. increase less than will the consumer price index. c. increase more than will the consumer price index. d. not increase, but the consumer price index will increase. ANSWE ! b. increase less than will the consumer price index. "#$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 0 AN'*%! #
1.

An Egyptian company produces sweaters in the <nited States and exports all of them to 7ithuania. *ther things the same, if the price of these sweaters increases, the /'$ deflator a. increases and the ($) is unchanged. b. and the ($) are unchanged. c. and the ($) both increase. d. is unchanged and the ($) increases. ANSWE ! a. increases and the ($) is unchanged. "#$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 0 AN'*%! #
10

"he bas3et of goods in the consumer price index changes a. occasionally, while the bas3et of goods in the /'$ deflator changes each time it is computed. b. each time it is computed, while the bas3et of goods in the /'$ deflator changes occasionally. c. occasionally, as does the bas3et of goods in the /'$ deflator. d. each time it is computed, as does the bas3et of goods in the /'$ deflator. ANSWE ! a. occasionally, while the bas3et of goods in the /'$ deflator changes each time it is computed. "#$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 0 AN'*%! #
11

What is the purpose of measuring the overall level of prices in the economyA a. to allow consumers to 3now what 3inds of prices to expect in the future b. to allow the measurement of /'$ c. to allow comparison between dollar figures from different points in time d. All of the above are correct. ANSWE ! c. to allow comparison between dollar figures from different points in time "#$E! % &E#1! ' SE(")*N! . *+,E(")-E! 1 AN'*%! #
12

+abe uth@s 1?01 salary was B=:,:::. "he price index for 1?01 is 12.. and the price index for 1??? is 188. uth@s 1?01 salary was e>uivalent to a 1??? salary of about a. B=,;::. b. B=;,:::. c. B=;:,:::. d. B=,;::,:::. ANSWE ! c. B=;:,:::. "#$E! % &E#1! ' SE(")*N! . *+,E(")-E! 1 AN'*%! #
18

(raig is offered a B1.:,::: per year Cob in 7os Angeles, and a B?:,::: per year Cob in A3ron. "he ($) for 7os Angeles is 18: and the ($) for A3ron is 1.:. What is the 7os Angeles Cob@s purchasing power in DA3ron dollarsEA a. B18:,::: b. B1.:,::: c. B?:,::: d. B82,::: ANSWE ! c. B?:,::: "#$E! % &E#1! ' SE(")*N! . *+,E(")-E! 1 AN'*%! #

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1;

A (*7A automatically raises the wage rate when a. real /'$ increases. b. the labor force increases. c. taxes increase. d. the consumer price index increases. ANSWE ! d. the consumer price index increases. "#$E! % &E#1! ' SE(")*N! . *+,E(")-E! 1 AN'*%! #
1=

"he nominal interest rate is a. the interest rate paid or charged by a ban3. b. the interest rate as usually reported without a correction for the effects of inflation. c. both a and b above. d. None of the above is correct. ANSWE ! c. both a and b above. "#$E! % &E#1! ' SE(")*N! . *+,E(")-E! 2 AN'*%! #
1?

Which of the following is the most accurate statement about the relationship between the nominal interest rate and the real interest rateA a. "he real interest rate is the nominal interest rate minus the rate of inflation. b. "he real interest rate is the nominal interest rate divided by the price level. c. "he real interest rate is the nominal interest rate times the price level. d. "he real interest rate is the nominal interest rate times the expected price level divided by the current price level. ANSWE ! a. "he real interest rate is the nominal interest rate minus the rate of inflation. "#$E! % &E#1! ' SE(")*N! . *+,E(")-E! 2 AN'*%! #
.:

)f the nominal interest rate is =F and rate of inflation is .F, the real interest rate is a. 18F. b. 1:F. c. 8F. d. 1F. ANSWE ! c. 8F. "#$E! % &E#1! ' SE(")*N! . *+,E(")-E! 2 AN'*%! #
.1

"he nominal interest rate tells you a. how fast the purchasing power of your ban3 account rises over time. b. how fast the number of dollars in your ban3 account rises over time. c. the number of dollars in your ban3 account. d. the purchasing power of your ban3 account. ANSWE ! b. how fast the number of dollars in your ban3 account rises over time. "#$E! % &E#1! ' SE(")*N! . *+,E(")-E! 2 AN'*%! #
..

"he real interest rate tells you a. the number of dollars in your ban3 account. b. the purchasing power of your ban3 account. c. how fast the number of dollars in your ban3 account rises over time. d. how fast the purchasing power of your ban3 account rises over time. ANSWE ! d. how fast the purchasing power of your ban3 account rises over time. "#$E! % &E#1! ' SE(")*N! . *+,E(")-E! 2 AN'*%! #

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.0

Which of the following is the most accurate statement about nominal and real interest ratesA a. Nominal and real interest rates often do not move together. b. Nominal and real interest rates always move together. c. Nominal and real interest rates never move together. d. Nominal and real interest rates are identical. ANSWE ! a Nominal and real interest rates often do not move together. "#$E! % &E#1! ' SE(")*N! . *+,E(")-E! 2 AN'*%! #
.1

Samantha deposits B1,::: in a saving account that pays an annual interest rate of 1F. *ver the course of a year the inflation rate is 1F. At the end of the year Samantha has a. B1: more in her account, and her purchasing power has increased B0:. b. B0: more in her account and her purchasing power has increased B2:. c. B2: more in her account, and her purchasing power has increased B0:. d. B1: more in her account, and her purchasing power has increased B1:. ANSWE ! a. B1: more in her account, and her purchasing power has increased B0:. "#$E! % &E#1! ' SE(")*N! . *+,E(")-E! 2 AN'*%! #
.2

)n the late 1?;:s, nominal interest rates were high and inflation rates were very high. As a result, real interest rates were a. very high. b. moderately high. c. low, but never negative. d. low, and in some years they were negative. ANSWE ! d. low, and in some years they were negative. "#$E! % &E#1! ' SE(")*N! . *+,E(")-E! 2 AN'*%! #

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ANSWE ! c. has to spend more dollars to maintain the same standard of living. "#$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
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ANSWE ! d. percentage change in the price level from the previous period. "#$E! % &E#1! ' SE(")*N! )N" *+,E(")-E! AN'*%! #
0

ANSWE ! c. goods and services bought by a typical consumer. "#$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
1

ANSWE ! d. that typical consumers buy. "#$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
2

ANSWE ! b. benchmar3 against which other years are compared. "#$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
8

ANSWE ! a. given year divided by the price of the bas3et in the base year, then multiplied by 1::. "#$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
;

ANSWE ! c. housing, food and beverages, and medical care. "#$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 1 AN'*%! #
=

ANSWE ! d. overstated by the ($) because the ($) is based on a fixed bas3et of goods that does not reflect increases in the purchases of goods that become relatively cheap. "#$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! . AN'*%! #
?

ANSWE ! c. if the >uality of a good improves, the purchasing power of a dollar increases even if the price of the good remains the same. "#$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! . AN'*%! #
1:

ANSWE ! b. Economists debate both the severity of the ($) bias and what to do about it. "#$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! . AN'*%! #
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ANSWE ! b. increase less than will the consumer price index. "#$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 0 AN'*%! #
1.

ANSWE ! a. increases and the ($) is unchanged. "#$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 0 AN'*%! #
10

ANSWE ! a. occasionally, while the bas3et of goods in the /'$ deflator changes each time it is computed. "#$E! % &E#1! ' SE(")*N! 1 *+,E(")-E! 0 AN'*%! #
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ANSWE ! c. to allow comparison between dollar figures from different points in time "#$E! % &E#1! ' SE(")*N! . *+,E(")-E! 1 AN'*%! #

12

ANSWE ! c. B=;:,:::. "#$E! % &E#1! ' SE(")*N! . *+,E(")-E! 1 AN'*%! #

18

ANSWE ! c. B?:,::: "#$E! % &E#1! ' SE(")*N! . *+,E(")-E! 1 AN'*%! #

1;

ANSWE ! d. the consumer price index increases. "#$E! % &E#1! ' SE(")*N! . *+,E(")-E! 1 AN'*%! #
1=

ANSWE ! c. both a and b above. "#$E! % &E#1! ' SE(")*N! . *+,E(")-E! 2 AN'*%! #
1?

ANSWE ! a. "he real interest rate is the nominal interest rate minus the rate of inflation. "#$E! % &E#1! ' SE(")*N! . *+,E(")-E! 2 AN'*%! #

.:

ANSWE ! c. 8F. "#$E! % &E#1! ' SE(")*N! . *+,E(")-E! 2 AN'*%! #

.1

ANSWE ! b. how fast the number of dollars in your ban3 account rises over time. "#$E! % &E#1! ' SE(")*N! . *+,E(")-E! 2 AN'*%! #
..

ANSWE ! d. how fast the purchasing power of your ban3 account rises over time. "#$E! % &E#1! ' SE(")*N! . *+,E(")-E! 2 AN'*%! #
.0

ANSWE ! a Nominal and real interest rates often do not move together. "#$E! % &E#1! ' SE(")*N! . *+,E(")-E! 2 AN'*%! #
.1

ANSWE ! a. B1: more in her account, and her purchasing power has increased B0:. "#$E! % &E#1! ' SE(")*N! . *+,E(")-E! 2 AN'*%! #
.2

ANSWE ! d. low, and in some years they were negative. "#$E! % &E#1! ' SE(")*N! . *+,E(")-E! 2 AN'*%! #