ECN 24

If the consumer price index was 97 in 2008, 100 in 2010, 101 in 2012, and 104 in 2014, then the base year must be

2010 (always 100)

Coffee is weighted more than tea in the calculation of the CPI if

Consumers buy more coffee than tea

The consumer price index is a perfect measure of inflation in our economy

FALSE

The nominal interest rate tells you

How fast the number of dollars in your bank account rises over time

The CPI is able to measure changes in the quality of goods over time

Imprecisely because it is relatively complicated to measure quality changes

The Bureau of Labor Statistics reports the CPI

Monthly

The CPI is based on a basket of fixed goods and services and does not reflect the increase in the value of the dollar that arises from the introduction

New goods

Which of the following is correct?

Nominal and real interest rates do not always move together

When ranking movies by nominal box office receipts, what important facts is overlooked?

Prices, including those for movie tickets, have been rising over time

Which of the following statements about real and nominal interest rates is correct?

Real interest rates can be either positive or negative, but nominal interest rates must be positive

Suppose that the prices of a dairy products have risen relatively less than prices in general over the last several years. To which problem in the construction of the CPI is in this situation most relevant?

Substitution Bias

The difference between the nominal interest rate and the real interest rate is equal to the inflation rate

TRUE

Social Security payments are indexed for inflation using the CPI. A recent newspaper editorial claimed that social security recipients are harmed by years of low inflation because they do not receive as large an increase in their payments as they do in years of high inflation. Which of the following statements is correct?

The newspaper editorial could be correct if the prices of the goods consumed by Social Security recipients change at a different rate than the prices of the goods in the market basket used to compute the CPI

The CPI computes the price of a basket of goods of ...

constant quality, although goods can improve or deteriorate over time

If a price index is calculated assuming a fixed basket of goods, it ignores

consumer substitution

The real interest rate tells you

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

A Cost of living allowance (COLA) automatically raises the wage when

the consumer price index increases