Economics Chapter 7

February 2010, the price of gasoline in the Florida was $2.629 per gallon and the CPI was 202.4 with a base period of 1982 to 1984. What was the real price of gasoline per gallon in base period dollars? A) $2.629 per gallon B) $1.29 per gallon C) $1.00 per gallon D) $1.809 per gallon E) $5.32 per gallon

$1.29 per gallon

If you are earning $20,000 this year and the CPI is 165, your real income in base year prices is A) $121.21. B) $20,000. C) $12,121.21. D) $16,500. E) $33,000.

$12,121.21

The formula for the CPI is A) (Cost of CPI market basket this year × Cost of CPI market basket at base period prices) ÷ 100. B) (Cost of CPI market basket at base period prices ÷ Cost of CPI market basket at current period prices) × 100. C) (Cost of CPI market basket at current period prices ÷ Cost of CPI market basket at base period prices) × 100. D) (Cost of CPI market basket at current period prices ÷ Cost of CPI market basket at next year's prices) × 100. E) (Cost of CPI market basket this year × Cost of CPI market basket at base period prices) × 100.

(Cost of CPI market basket at current period prices ÷ Cost of CPI market basket at base period prices) × 100.

Consumers in Beachland consume only two goods, sodas and DVDs. If they spend $10 on sodas and $90 on DVDs a month, how many sodas and DVDs are in their CPI market basket if the price of a soda is $1 and the price of a DVD is $9? A) 10 sodas and 9 DVDs B) 1 soda and 9 DVDs C) 9 sodas and 1 DVD D) 10 sodas and 10 DVDs E) It is impossible to determine the market basket without information on the quantity of at least one of the two goods consumed.

10 sodas and 10 DVDs

The reference base period for the CPI has an index number of A) 10. B) 0. C) 100. D) 1. E) 1,000.

100

The inflation rate between last year and this year was 14 percent. The CPI was 118 this year. What was the CPI last year? A) 104.5 B) 103.0 C) 105.0 D) 104.0 E) 103.5

103.5

If for a given year nominal GDP is $2000 billion and real GDP is $1500 billion, then the GDP price index is A) 100. B) 133. C) 0.75. D) 1.33. E) 750.

133

If the bank returns $1,060 on the $1,000 deposited for a year during which inflation was 4 percent, the real interest rate is A) 2 percent. B) 6 percent. C) -2 percent. D) 16 percent. E) 10 percent.

2 percent

If the cost of the CPI market basket at current period prices is $1000 and the cost of the CPI market basket at base period prices is $250, the CPI is A) 2.50. B) 400. C) 250. D) 4.0. E) 100.

400

Citicorp charges an 11 percent interest rate on all new car loans. If the inflation rate is 6 percent, Citicorp receives a real interest rate of A) 6 percent. B) 0.54 percent. C) 1.83 percent. D) 5 percent. E) 11 percent.

5 percent

If the real interest rate is 5 percent when the inflation rate is 4 percent, the nominal interest rate is A) 9 percent. B) .80 percent. C) 20 percent. D) 1.25 percent. E) 1 percent.

9 percent

When we compare the records of the CPI and the PCE price index over time, the A) two are very different in magnitude. B) two measures are identical. C) CPI tends to exceed the PCE price index when inflation is high, and the PCE price index tends to exceed the CPI when inflation is low. D) PCE price index tends to exceed the CPI. E) CPI tends to exceed the PCE price index.

CPI tends to exceed the PCE price index.

Which of the following formulas is used to calculate the inflation rate? A) inflation rate = 100 ×(CPI in base year/CPI in current year) B) inflation rate = 100 ×(CPI in previous year/CPI in current year) C) inflation rate = 100 ×(CPI in current year/CPI in base year) D) Inflation rate = 100 ×(CPI in previous year-CPI in currant year/CPI in currant year) E) Inflation rate = 100 ×(CPI in current year-CPI in previous year/CPI in previous year)

Inflation rate = 100 × (CPI in current year-CPI in previous year/CPI in previous year)

Which of the following formulas would you use to calculate the Real wage rate? A) Real wage rate = Nominal wage rate ÷ CPI B) Real wage rate = (Nominal wage rate ÷ CPI) × 100 C) Real wage rate = (Nominal wage rate × CPI) × 100 D) Real wage rate = Nominal wage rate × CPI E) Real wage rate = (Nominal wage rate × CPI) ÷ 100

Real wage rate = (Nominal wage rate ÷ CPI) × 100

The CPI market basket is determined by A) tax return data of households. B) profit releases of the largest companies. C) The Consumer Expenditure Survey. D) surveys asking large retail companies, such as Wal-Mart, about their sales of consumer goods and services. E) supermarket purchases recorded by scanner technology.

The Consumer Expenditure Survey.

Your wage this year is $15 per hour and the CPI is 178. Next year you get a raise to $17 and the CPI rises to 185. What has happened? A) Your real wage rate has increased by a larger percentage than your nominal wage. B) Your nominal wage has increased but your real wage has not changed. C) Your real and nominal wages have each increased by the same percentage. D) Your real wage has increased but by a smaller percentage than your nominal wage. E) Your nominal wage has increased but your real wage has declined.

Your real wage has increased but by a smaller percentage than your nominal wage.

The GDP deflator is A) the price level during the base year. B) a measure of the level of production. C) a measure of the price level. D) equal to nominal GDP during the base year. E) always greater than 100.

a measure of the price level.

If higher prices cause buyers to shop at discount stores, the CPI has A) a new goods bias. B) a commodity substitution bias. C) a discounted bias. D) a quality change bias. E) an outlet substitution bias.

an outlet substitution bias.

The CPI is a measure of the A) average prices paid by consumers for a fixed basket of goods and services. B) average prices of all goods. C) percentage change in the price level. D) average change in the output of the goods and services purchased by a typical urban consumer. E) average prices of all goods and services produced.

average prices paid by consumers for a fixed basket of goods and services.

Looking at the historical values for annual inflation in the United States as measured by the Consumer Price Index, it is clear that inflation was A) higher on average during the 2000s than during the 1970s. B) never less than 0 percent at any time during the last 50 years. C) higher on average during the 1970s than during the 1980s. D) was never greater than 10 percent at any time during the last 50 years. E) higher on average during the 1990s than during the 1970s.

higher on average during the 1970s than during the 1980s.

According to the CPI basket, the largest item in the households' budgets is A) apparel. B) food. C) housing. D) education. E) transportation.

housing

Which of the following is a bias in the CPI? i. new goods bias ii. index change bias iii. commodity substitution bias A) ii only B) i and iii C) i, ii, and iii D) i only E) iii only

i and iii

If the nominal wage is $30 in 2011 and the CPI is 202 in 2011, then the real wage in 1982-1984 dollars A) is $29.00. B) is $1.48. C) is $14.85. D) is $30. E) cannot be calculated without the past year wage rate.

is $14.85

Economists agree that the CPI A) has no relation to the cost of living. B) is a near perfect measure of the cost of living. C) overstates inflation by about 4.1 percentage points a year. D) is a possibly biased measure of the cost of living. E) almost always shows the cost of living rising less rapidly than is the case in reality.

is a possibly biased measure of the cost of living.

Because a third of government outlays are linked directly to the CPI, as time passes, the CPI bias means that the government's outlays are A) larger than needed to keep pace with the cost of living. B) smaller than needed to keep pace with the cost of living. C) exactly equal to the changes in the cost of living. D) larger than needed to keep pace with the cost of living if the CPI is falling from one year to the next, otherwise the outlays are smaller than needed to keep pace with the cost of living. E) smaller than needed to keep pace with the cost of living if the CPI is falling from one year to the next, otherwise the outlays are larger than needed to keep pace with the cost of living.

larger than needed to keep pace with the cost of living.

During 1990, a Hershey candy bar cost $.85. By 2007, the same Hershey candy bar cost $1.25. If the CPI was 130.7 in 1990 and 180.5 in 2007, the price of the 1990 Hershey candy bar in 2007 prices is A) less than the price of the 2007 Hershey candy bar. B) equivalent to the price of the 2007 Hershey candy bar. C) greater than the price of the 2007 Hershey candy bar. D) perhaps greater than, perhaps less, or perhaps the same depending on whether the CPI in 2007 has been adjusted to reflect 2007 prices. E) not able to be determined given the information in the question.

less than the price of the 2007 Hershey candy bar.

The CPI is calculated by the Bureau of Labor Statistics on a frequency of every A) week. B) quarter. C) month. D) decade, along with the Census. E) year.

month

If the CPI decreases from one year to the next, then the inflation rate is A) positive. B) 0. C) negative. D) above 100. E) below 100.

negative

The real interest rate equals the A) (nominal interest rate ÷ inflation rate). B) (nominal interest rate + inflation rate) × 100. C) inflation rate - nominal interest rate. D) nominal interest rate + inflation rate. E) nominal interest rate - inflation rate.

nominal interest rate - inflation rate.

The difference between nominal and real is A) nominal is measured in current dollars and real is measured in dollars of a given year. B) real is a number stated in dollars and nominal is stated with an index number. C) real is measured in current dollars and nominal is measured in dollars of a given year. D) nominal is a number stated in dollars and real is stated with an index number. E) both nominal and real are measured with index numbers, only the nominal index is greater than 100 and the real index is less than 100.

nominal is measured in current dollars and real is measured in dollars of a given year.

The fact the consumers substitute one good for another when prices change is A) taken into account by the fixed market basket used in calculating the CPI. B) a reason why the CPI is used to calculate inflation rates. C) not taken into account by the fixed market basket used in calculating the CPI. D) not important to economists. E) a reason why the CPI understates the actual change in the cost of living.

not taken into account by the fixed market basket used in calculating the CPI.

The inflation rate is the A) difference between the base period CPI and the current period CPI. B) difference between the current period CPI and the base period CPI. C) percentage change in the CPI from one year to the next year. D) difference in the price level from one year to the next multiplied by 100. E) percentage change in the composition of the CPI market basket from the base year to the next year.

percentage change in the CPI from one year to the next year.

When a good gets better from one year to the next, the CPI has a what is called A) magnitude of change bias. B) quality change bias. C) new goods bias. D) commodity substitution bias. E) outlet substitution bias.

quality change bias.

If the inflation rate is greater than the nominal interest rate, then the A) inflation rate will decrease. B) nominal interest rate will be negative. C) inflation rate will increase. D) real interest rate will be negative. E) real interest rate will be positive.

real interest rate will be negative.

To compare the price of a loaf of bread produced in 1993 with the price of a loaf produced in this year, you should compare the value of the bread in A) nominal quantity. B) real quantity. C) CPI quantity. D) real prices. E) nominal prices.

real prices

If average annual tuition at public 4-year colleges was $1,908 in 1990, when the CPI was 130.7, and $8,655 in 2012 when the CPI was 229.6, then the real cost of annual tuition A) rose by 354 percent during that period. B) fell by 354 percent during that period. C) rose by 75.7 percent during that period. D) fell by 158 percent during that period. E) rose by 158 percent during that period.

rose by 158 percent during that period.