Econ 102: Chapter 9

2016 2017 Quantity Price 10 $30 8 $50 Quantity Price 20 $1 15 $2 In 2016, consumers in Dexter consumed only books and pens. The prices and quantities for 2016 and 2017 are listed in the table above. The reference base period for Dexter's CPI is 2016. What is the cost of the CPI basket in 2017?

$540

If this year's price level exceeds last year's

the inflation rate between these years has been positive

In China, suppose that the price level was 100 in 2014, 110 in 2015, and 120 in 2016. Over these three years

the inflation rate was positive

Suppose that the price level was 100 in 2014, 110 in 2015, and 130 in 2016. Over these three years

the inflation rate was positive and accelerating

Assume the inflation rate falls from 4 percent to 2 percent. This means that

the price level is increasing more slowly

The technique currently used to calculate the CPI implicitly assumes that over time consumers buy

the same relative quantities of goods as in a base year.

Which of the following measurements of inflation tracks the rate at which infrequently changed prices are changing?

the sticky-price CPI

The cost of inflation to society includes

unpredictable changes in the value of money

Hyperinflation is defined as

very high inflation rates

Which of the following measurements of inflation strips out volatile food and fuel prices?

the core PCE

At the end of last year, the CPI equaled 120. At the end of this year, the CPI equals 132. What is the inflation rate over this year?

10 percent

Year Price level 2012 91 2013 100 2014 110 2015 121 In the above table, the inflation rate between 2013 and 2014 is approximately

10 percent

The CPI basket contains 400 oranges and 800 pens. In the base year, the price of an orange is $1.00 and the price of a pen is $0.75. This year, urban consumers each buy 300 oranges at $2.00 each and 850 pens at $1.00 each. The CPI this year is

160.

Which of the following means that the CPI overstates the actual inflation rate?

All of the above cause the CPI to overstate inflation

Suppose the CPI last year is 121 and the CPI this year is 137. The CORRECT method to calculate the inflation rate is

[(137 - 121)/121] × 100 = 13.2.

Inflation is a problem when

all of the above answers are correct

The cost of inflation to society includes I. the opportunity costs of resources used by people to protect themselves against inflation. II. the diversion of productive resources to forecasting inflation.

both I and II

The Consumer Price Index (CPI)

compares the cost in the current period to the cost in a reference base period of a basket of goods typically consumed in the base period.

The commodity substitution bias is that

consumers decrease the quantity they buy of goods whose relative prices rise and increase the quantity of goods whose relative price falls.

If the inflation rate is negative, the price level in an economy is

falling

An increase in the price level is defined as

inflation

Unpredictable changes in the value of money, which brings about gains and losses, are a consequence of unpredictable changes in

inflation

If the price level for the last three months has been 112, 125, and 126, we would say

inflation was more rapid between the first and second month than between the second and third month

If a new and better good replaced an older and less expensive good, then the price level measured by the CPI

is higher than the actual price level

As currently calculated, the CPI tends to overstate the true inflation rate because

it fails to correctly measure quality changes for some products.

Because of the biases in calculating the CPI, actual inflation is

less than the measured inflation rate

The biases in the CPI include the

new goods, quality change, and substitution biases

The bias in the CPI typically

overstates inflation

In July 2014, the CPI inflation rate was 0.3 percent while the core CPI inflation rate was 0.1 percent. The difference between these two measurements of inflation indicates

prices for food and fuel were increasing more rapidly than prices for other goods.

The currently used method for calculating the CPI

probably overstates inflation.

In the United States, the inflation rate has

risen and fallen since the 1970s.

Substitution bias in the CPI refers to the fact that the CPI

takes no account of the substitution of goods by consumers when relative prices change.