Chapter 16

If Year 1 is the base year and Year 2 is the following year, then the inflation rate in Year 2 equals a. [(CPI in Year 2 − CPI in Year 1)/CPI in Year 1] × 100. b. [(CPI in Year 2 − CPI in Year 1)/CPI in Year 2] × 100. c. [(CPI in Year 1 − CPI in Year 2)/CPI in Year 1] × 100. d. [(CPI in Year 1 − CPI in Year 2)/CPI in Year 2] × 100.

a. [(CPI in Year 2 − CPI in Year 1)/CPI in Year 1] × 100.

By far the largest category of goods and services in the CPI basket is a. housing. b. transportation. c. education & communication. d. food & beverages.

a. housing.

If the consumer price index was 100 in the base year and 106 in the following year, then the inflation rate was a. 1.06 percent. b. 6 percent. c. 10.6 percent. d. 106 percent

b. 6 percent.

The consumer price index is used to a. monitor changes in the level of wholesale prices in the economy. b. monitor changes in the cost of living over time. c. monitor changes in the level of real GDP over time. d. monitor changes in the stock market.

b. monitor changes in the cost of living over time.

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

The CPI is more commonly used as a gauge of inflation than the GDP deflator is because the a. CPI is easier to measure. b. CPI includes more goods and services that the GDP deflator does. c. CPI better reflects the goods and services bought by consumers. d. GDP deflator cannot be used to gauge inflation.

c. CPI better reflects the goods and services bought by consumers.

The inflation rate is defined as the a. price level in an economy. b. change in the price level from one period to the next. c. percentage change in the price level from the previous period. d. price level minus the price level from the previous period.

c. percentage change in the price level from the previous period.

The producer price index measures the cost of a basket of goods and services a. typically produced in the economy. b. produced for a typical consumer. c. sold by producers. d. bought by firms.

d. bought by firms.

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

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

Which of the following is the correct formula for calculating the consumer price index? a. [(CPI in Year 1 − CPI in Year 2)/CPI in Year 2] × 100 b. [(price of basket of goods and services in current year/price of basket in base year)]× 100 c. [(price of basket of goods and services in current year − price of basket in base year)/price of basket in base year] × 100 d. [(price of basket of goods and services in base year/price of basket in current year)] × 100

c. [(price of basket of goods and services in current year − price of basket in base year)/price of basket in base year] × 100

The steps involved in calculating the consumer price index and the inflation rate, in order, are as follows: a. Choose a base year, update the basket, find the prices, estimate the basket's cost, compute the index, and compute the inflation rate. b. Choose a base year, fix the basket, find the prices, compute the inflation rate, compute the basket's cost, and compute the index. c. Fix the basket, find the prices, compute the basket's cost, choose a base year and compute the index, and compute the inflation rate. d. Fix the basket, find the prices, compute the inflation rate, compute the basket's cost, and choose a base year and compute the index.

c. Fix the basket, find the prices, compute the basket's cost, choose a base year and compute the index, and compute the inflation rate.

Two common measures of the overall level of prices are a. the inflation rate and the consumer price index. b. the inflation rate and the GDP deflator. c. the GDP deflator and the consumer price index. d. the cost of living index and nominal GDP.

c. the GDP deflator and the consumer price index.