Chapter 24: Measuring the Cost of Living and Inflation

If the consumer price index was 100 in 2008, 102 in 2010, 105 in 2012, in 107 in 2014, then the base year must be

2008

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

Of Social Security benefits and federal income tax brackets, which is indexed?

Both are indexed.

The ______ is responsible for calculating and reporting the CPI.

Bureau of Labor Statistics

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

False

The consumer price index is the only measure of inflation used in the United Sates.

False

The steps involved in calculating the consumer price index and the inflation rate, in order, are as follows:

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

A general increase in the price level of goods and services in an economy describes

Inflation

The Bureau of Labor Statistics reports the CPI

Monthly

When ranking movies by nominal box office receipts, what important fact 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.

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.

Nominal and real interest rates do not always move together.

True

The Bureau of Labor Statistics calculates the CPI.

True

The CPI is used to monitor change in the cost of living over time.

True

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

True

The nominal interest rate tells you

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

The real interest rate tells you

how fast the purchasing power of 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.

Substitution bias is a problem when measuring the consumer price index because

prices of goods and services do not change in the same proportion from year to year.

Which of the following statements is correct for explaining why the CPI is commonly used as a measure of inflation?

the CPI better reflects the prices of goods and services bought by consumers.

A COLA automatically raises the wage when

the consumer price index increases.

The CPI is a measure of the overall cost of

the goods and services purchased by a typical consumer.

Indexation refers to

using a law or contract to automatically correct a dollar amount for the effects of inflation.

The three problems with using the consumer price index as a measure of the cost of living are

widely acknowledged and difficult to solve.

The _______ is the most commonly reported measure of inflation by the media.

CPI

The best measure for changes in the price level of a consumer basket of goods and services over time is the

CPI since it measures changes in the prices of a basket of goods and services consumed by a typical consumer over time.

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

Consumers buy more coffee than tea.