ECON 1040 Chapter 6
15. Recent changes in methods used to compute the CPI have made the a. upward bias in the CPI inflation rate more severe than it used to be. b. upward bias in the CPI inflation rate less severe than it used to be. c. downward bias in the CPI inflation rate more severe than it used to be. d. downward bias in the CPI inflation rate less severe than it used to be.
B
21. The nominal interest rate tells you a. how fast the number of dollars in your bank account rises over time. b. how fast the purchasing power of your bank account rises over time. c. the number of dollars in your bank account today. d. the purchasing power of your bank account today.
A
5. For an imaginary economy, the value of the consumer price index was 140 in 2013 and 146.5 in 2014. The economy's inflation rate for 2014 was a. 4.6 percent. b. 6.5 percent. c. 4.4 percent. d. 46.5 percent.
A
6. Between October 2014 and October 2015, the CPI in Canada rose from 120 to 124 and the CPI in Mexico rose from 210 to 229.1. What were the inflation rates for Canada and Mexico over this oneyear period? a. 3.3 percent for Canada and 9.1 percent for Mexico b. 3.3 percent for Canada and 8.3 percent for Mexico c. 3.2 percent for Canada and 9.1 percent for Mexico d. 3.2 percent for Canada and 8.3 percent for Mexico
A
14. Michelle bought word-processing software in 2009 for $75. Michelle's cousin, Barry, bought an upgrade of the same software in 2010 for $75. To which problem in the construction of the CPI is this situation most relevant? a. substitution bias b. unmeasured quality change c. introduction of new goods d. income bias
B
20. Indexation refers to a. a process of adjusting the nominal interest rate so that it is equal to the real interest rate. b. using a law or contract to automatically correct a dollar amount for the effects of inflation. c. using a price index to deflate dollar values. d. an adjustment made by the Bureau of Labor Statistics to the CPI so that the index is in line with the GDP deflator.
B
4. 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
1. Consider a small economy in which consumers buy only two goods: pretzels and cookies. In order to compute the consumer price index for this economy for two or more consecutive years, we assume that a. the percentage change in the price of pretzels is equal to the percentage change in the price of cookies from year to year. b. the number of pretzels bought by the typical consumer is equal to the number of cookies bought by the typical consumer in each year. c. neither the number of pretzels nor the number of cookies bought by the typical consumer changes from year to year. d. neither the price of pretzels nor the price of cookies changes from year to year
C
12. When the relative price of a good increases, consumers respond by buying a. a larger quantity of that good and a larger quantity of substitutes for that good. b. a larger quantity of that good and a smaller quantity of substitutes for that good. c. a smaller quantity of that good and a larger quantity of substitutes for that good. d. a smaller quantity of that good and a smaller quantity of substitutes for that good.
C
13. For some racquet sports, there have been increases in the size of the racquets; also, the methods and materials used for making racquets have improved. To which problem in the construction of the CPI is this situation most relevant? a. substitution bias b. introduction of new goods c. unmeasured quality change d. income bias
C
16. The CPI differs from the GDP deflator in that a. the CPI is a price index, while the GDP deflator is an inflation index. b. substitution bias is not a problem with the CPI, but it is a problem with the GDP deflator. c. increases in the prices of foreign produced goods that are sold to U.S. consumers show up in the CPI but not in the GDP deflator. d. increases in the prices of domestically produced goods that are sold to the U.S. government show up in the CPI but not in the GDP deflator.
C
19. In 1986, Ken bought a Ford Mustang for $8,000. If the price index was 122 in 1986 and the price index was 280 in 2011, then what is the price of the Mustang in 2011 dollars? a. $3,485.71 b. $8,100.71 c. $18,360.66 d. $22,400.00
C
10. 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
11. When constructing the consumer price index, the Bureau of Labor Statistics does not do which of the following? a. Try to include all the goods and services that the typical consumer buys. b. Try to weight the goods and services that the typical consumer buys according to how much consumers buy of each item. c. Survey consumers to determine what the typical consumer buys. d. Survey sellers to determine what the typical consumer buys.
D
17. Price changes from year to year are not proportional, and consumers respond to these changes by altering their spending patterns. The problem this creates for inflation calculations is called a. deflation. b. inflation. c. unmeasured quality change. d. substitution bias.
D
18. Ethel purchased a bag of groceries in 1970 for $8. She purchased the same bag of groceries in 2006 for $25. If the price index was 38.8 in 1970 and the price index was 180 in 2006, then what is the price of the 1970 bag of groceries in 2006 dollars? a. $5.39 b. $25.00 c. $29.11 d. $37.11
D
3. Suppose a basket of goods and services has been selected to calculate the CPI and 2012 has been selected as the base year. In 2012, the basket's cost was $50; in 2014, the basket's cost was $52; and in 2016, the basket's cost was $55. The value of the CPI in 2016 was a. 90.9. b. 104.0. c. 105.0. d. 110.0.
D
