3.3.1: Changes in the Living and the CPI

A large increase in the price of military helicopters will have a larger impact on the consumer price index than would a large increase in the price of gasoline. Select one: True False

False The basket of goods used to derive the consumer price index contains only items that a typical consumer would purchase. Transportation costs (gasoline) is a major component of the basket but military equipment is not a component because typical consumers do not buy military equipment.

The GDP deflator is often used as the basis to increase Social Security benefits and cost-of-living allowances (COLAs) in labor contracts. Select one: True False

False The consumer price index is usually used to adjust wages in labor contracts to match increases in the cost of living. National legislation mandates that Social Security benefits increase each year at the same rate as the increase in the CPI.

The producer price index (PPI) that measures consumer prices is believed to be better than the CPI and is widely reported as a better measure of inflation. Select one: True False

False The producer price index reports the changes in a basket of goods that would typically be purchased by firms. It is believed to be a predictor of future changes in the CPI because many production cost increases are passed on to consumers. It is not as widely reported or used as the CPI.

The largest category of consumer spending in the U.S. is Select one: a. housing. b. food and beverages. c. transportation. d. medical care.

a

Suppose inflation is predicted to be 6% in the coming year. If instead it is only 3%, which group of people will suffer an economic loss? Select one: a. Borrowers b. Lender c. Neither group because lower inflation benefits both d. Both groups because they both experience the same inflation rate

a. Borrowers lose when inflation is lower than expected because lenders build the expected rate into their interest rates. When a person gets a loan, he / she pays for the expected inflation rate.

The consumer price index (CPI) Select one: a. compares the cost of a basket of goods consumed in the base year to the cost of the same basket in another year. b. compares the cost of a basket of goods consumed in the base year to the cost of another basket of goods consumed in another year. c. measures the changes in the prices of goods included in GDP. d. is the ratio of the price of a basket of goods to its production costs.

a. The CPI compares a typical market basket of goods and services in two different time periods. The basket does not change from one year to the next so that the CPI can maintain some consistency over time.

The base year in any price index is Select one: a. always the same year. b. the year against which any changes are measured. c. the latest year for which the government has data. d. the year immediately prior to the one you are studying. Check

b. The base year is any year against which inflation and deflation are measured. The base year index number is always 100. Other years are either greater or less than 100. Economists measure price changes by comparing the index numbers.

If the nominal interest rate is 12% and the inflation rate is 5%, the real rate of return is Select one: a. 12%. b. 5%. c. 7%. d. The real rate of return cannot be determined from the information given.

c

The market basket of goods from which the CPI is derived is composed of Select one: a. natural resources that firms use to produce final goods. b. total production in a year. c. products that a typical consumer would buy. d. household production such as child care and housework.

c

If a person's income increases from $50,000 to $60,000 in a year and the CPI has increased from 120 to 144, the person's standard of living has most likely Select one: a. risen. b. fallen. c. remained the same. d. indeterminate because the base year is not given.

c. If income increases at a higher percentage than the CPI, you can assume the person's standard of living has increased. In this example, the percentage increase in the CPI and the percentage increase in the person's income are both 20%. The person's standard of living has remained the same.

A change in the producer price index (PPI) is thought to be useful in predicting Select one: a. changes in the stock price index. b. changes in consumer confidence. c. changes in the consumer price index. d. changes in the rate of output of goods and services. Check

c. The producer price index (PPI) is a "leading economic indicator" and includes many prices and inputs. It is very useful if an individual consumer is trying to make predictions about what's going to happen to their own cost of living in the future.

Which of the following changes in price indexes shows the greatest rate of inflation: 100 to 120, 150 to 180, or 190 to 228? Select one: a. 100 to 120 b. 150 to 180 c. 190 to 228 d. These three indexes show the same rate of inflation.

d. Calculate the rates of change: [(120 − 100) / 100] × 100 = 20%;[(180 − 150) / 150] × 100 = 20%;[(228 − 190) / 190] × 100 = 20%.