ECON 222 CPI practice questions

If the quality of a good deteriorates while its price remains the same, then the value of a dollar a) falls and the cost of living increases. b) rises and the cost of living increases. c) rises and the cost of living decreases. d) falls and the cost of living decreases.

a) falls and the cost of living increases.

When the consumer price index rises, the typical family a) has to spend more dollars to maintain the same standard of living. b) finds that its standard of living is not affected. c) can spend fewer dollars to maintain the same standard of living. d) can offset the effects of rising prices by saving more.

a) has to spend more dollars to maintain the same standard of living.

The real interest rate tells you a) how fast the purchasing power of your bank account rises over time. b) the purchasing power of your bank account today. c) the number of dollars in your bank account today. d) how fast the number of dollars in your bank account rises over time.

a) how fast the purchasing power of your bank account rises over time.

Your nominal wage increases from $12 per hour to $13 per hour. At the same time, the price level increases from 140 to 147. As a result, a) The number of dollars you receive decreases and the purchasing power of the dollars you receive decreases. b) The number of dollars you receive increases and the purchasing power of the dollars you receive increases. c) The number of dollars you receive increases and the purchasing power of the dollars you receive decreases. d) The number of dollars you receive decreases and the purchasing power of the dollars you receive increases.

b) The number of dollars you receive increases and the purchasing power of the dollars you receive increases.

In the United States, if the price of imported oil rises so that the prices of gasoline and heating oil rise, then the a) consumer price index rises slightly more than does the GDP deflator. b) consumer price index rises much more than does the GDP deflator. c) GDP deflator rises much more than does the consumer price index. d) GDP deflator and the consumer price index rise by about the same amount.

b) consumer price index rises much more than does the GDP deflator.

The nominal interest rate tells you a) the purchasing power of your bank account today. b) how fast the number of dollars in your bank account rises over time. c) how fast the purchasing power of your bank account rises over time. d) the number of dollars in your bank account today.

b) how fast the number of dollars in your bank account rises over time.

Your spouse complains that her 6% raise this year will not keep up with the increase in prices. In other words, she is unable to buy the same basket of goods with her 6% raise. Therefore, she believes that her a) nominal income decreased, but their real income increased. b) nominal income increased, but their real income decreased. c) nominal income and real income decreased. d) nominal income and real income increased.

b) nominal income increased, but their real income decreased.

When computing the cost of the basket of goods and services purchased by a typical consumer, which of the following changes from year to year? a) the quantities of the goods and services purchased b) the prices of the goods and services c.)the goods and services making up the basket d) All of the above are correct.

b) the prices of the goods and services

Which of the following is not correct? a) The consumer price index is used to monitor changes in the cost of living over time. b) The consumer price index is used by economists to measure the inflation rate. c) The consumer price index is used to measure the quantity of goods and services that the economy is producing. d) The consumer price index gives economists a way of turning dollar figures into meaningful measures of purchasing power.

c) The consumer price index is used to measure the quantity of goods and services that the economy is producing.

The primary purpose of measuring the overall level of prices in the economy is to a) allow consumers to know what kinds of prices to expect in the future. b) allow for the measurement of GDP. c) allow for the comparison of dollar figures from different points in time. d) allow for the comparison of dollar figures from the same point in time.

c) allow for the comparison of dollar figures from different points in time.

For any given year, the CPI is the price of the basket of goods and services in the a) previous year divided by the price of the basket in the given year, then multiplied by 100. b) given year divided by the price of the basket in the previous year, then multiplied by 100. c) given year divided by the price of the basket in the base year, then multiplied by 100. d) base year divided by the price of the basket in the given year, then multiplied by 100.

c) given year divided by the price of the basket in the base year, then multiplied by 100.

In the CPI, goods and services are weighted according to a) the number of firms that produce and sell each good or service. b) the extent to which each good or service is regarded by the government as a necessity. c) how much consumers buy of each good or service. d) how long a market has existed for each good or service.

c) how much consumers buy of each good or service.

The introduction of the video cassette recorder in the 1970s exemplified a problem in measuring the cost of living; that problem is the problem of a) unmeasured quality change. b) product-improvement bias. c) introduction of new goods. d) substitution bias.

c) introduction of new goods.

An important difference between the GDP deflator and the consumer price index is that a) the GDP deflator reflects the prices of all final goods and services produced by a nation's citizens, whereas the consumer price index reflects the prices of all final goods and services bought by consumers. b) the GDP deflator reflects the prices of goods and services bought by producers, whereas the consumer price index reflects the prices of goods and services bought by consumers. c) the GDP deflator reflects the prices of all final goods and services bought by producers and consumers, whereas the consumer price index reflects the prices of all final goods and services bought by consumers. d) the GDP deflator reflects the prices of all final goods and services produced domestically, whereas the consumer price index reflects the prices of goods and services bought by consumers.

d) the GDP deflator reflects the prices of all final goods and services produced domestically, whereas the consumer price index reflects the prices of goods and services bought by consumers.

Economists use the term inflation to describe a situation in which a) the economy's overall output of goods and services is rising faster than the economy's overall price level b) the economy's overall price level is high but not necessarily rising c) some prices are rising faster than others d) the economy's overall price level is rising

d) the economy's overall price level is rising

The consumer price index is subject to substitution bias because a) the index does not take into account the likelihood that consumers substitute newly-introduced goods for more-established goods. b) some goods are inferior rather than normal. c) some pairs of goods are complements rather than substitutes. d) the law of demand applies to most, if not all, goods.

d) the law of demand applies to most, if not all, goods.

The consumer price index is used to a) convert nominal GDP into real GDP b) characterize the types of goods and services that consumers purchase c) measure the quantity of goods and services that the economy produces d) turn dollar figures into meaningful measures of purchasing power

d) turn dollar figures into meaningful measures of purchasing power

Because the CPI is based on a fixed basket of goods, the introduction of new goods and services in the economy causes the CPI to overestimate the cost of living. This is so because a) new goods and services are always of higher quality than existing goods and services. b) new goods and services cost more than existing goods and services. c) new goods and services cost less than existing goods and services. d) when a new good is introduced, it gives consumers greater choice, thus reducing the amount they must spend to maintain their standard of living.

d) when a new good is introduced, it gives consumers greater choice, thus reducing the amount they must spend to maintain their standard of living.