macro chapter 11

Suppose the typical consumer buys more bananas than oranges. In fixing the basket of goods and services for the purpose of calculating the consumer price index, the Bureau of Labor Statistics

places more weight on the price of bananas than on the price of oranges; the weights of the two prices are determined by surveying consumers.

With respect to the consumer price index, which of the following does not serve as an example of how the substitution bias arises? Between 2010 and 2011, the price of a pound of peanuts

rises from $0.80 to $1.00 while the price of a loaf of bread rises from $2.00 to $2.50.

In 1979 and 1980,

the U.S. inflation rate as measured by the CPI was higher than that measured by the GDP deflator, and the difference was explained by rapidly rising oil prices.

If the price of domestically produced power tools increases, then

the consumer price index and the GDP deflator will both increase.

The inflation rate is calculated

by determining the percentage increase in the price index from the preceding period.

In the basket of goods that is used to compute the consumer price index, the three largest categories of consumer spending are

housing, transportation, and food & beverages.

The CPI is calculated

monthly.

By not taking into account the possibility of consumer substitution, the CPI

overstates the cost of living.

The price tag on a golf ball in 1975 read $0.20, and the price tag on a golf ball in 2005 read $2.00. The CPI in 1975 was 52.3, and the CPI in 2005 was 191.3. Refer to Scenario 24-2. In 1975 dollars, a 1975 golf ball cost $0.20 and a 2005 golf ball cost

$0.55, so golf balls were cheaper in 1975.

David earned a salary of $43,500 in 1994 and $89,000 in 2010. The consumer price index was 148.2 in 1994 and 215.3 in 2010. David's 1994 salary in 2010 dollars is

$63,195.34

Arlo is offered a job in Des Moines, where the CPI is 80, and a job in New York, where the CPI is 125. Arlo's job offer in Des Moines is for $42,000. How much does the New York job have to pay in order for the two salaries to represent the same purchasing power?

$65,625

When the relative price of a good increases, consumers respond by buying

a smaller quantity of that good and a larger quantity of substitutes for that good.

The consumer price index is

a useful measure, but not a perfect measure, of the cost of living.

Changes in the quality of a good

can lead to either an increase or a decrease in the value of a dollar.

If the quality of a good deteriorates while its price remains the same, then the value of a dollar

falls and the cost of living increases.

The CPI and the GDP deflator

generally move together.

The economy's inflation rate is the

percentage change in the price level from the previous period.

Suppose lawn mowers are part of the market basket used to compute the CPI. Suppose also that the quality of lawn mowers deteriorates while the price of lawn mowers stays the same. If the Bureau of Labor Statistics is able to precisely adjust the CPI for the improvement in quality, then, other things equal,

the CPI will rise.

A decrease in the price of domestically produced industrial robots will be reflected in

the GDP deflator but not in the consumer price index.

An increase in the price of Irish whiskey imported into the United States will be reflected in

the U.S. CPI, but not the U.S. GDP deflator.

Ruben earned a salary of $60,000 in 2001 and $80,000 in 2006. The consumer price index was 177 in 2001 and 221.25 in 2006. Ruben's 2001 salary in 2006 dollars is

$75,000; thus, Ruben's purchasing power increased between 2001 and 2006.

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 $51; and in 2016, the basket's cost was $52. The value of the CPI in 2014 was

102.0.

The nominal interest rate for a consumer loan lasting from 2007 to 2008 is 8.5 percent and the real interest rate is 4.5 percent. If the consumer price index was 200 in 2007, what would the consumer price index value be in 2008?

208

In 1972, one could buy a bag of chips, a pound of hamburger, a package of buns, and a small bag of charcoal for about $2.50. If the same goods today cost $6.00, then which pair of CPIs would make the cost in today's dollars the same for both years?

65 in 1972 and 156 today

Suppose the quality of beef changes over time, but the quality change goes unmeasured for the purpose of computing the consumer price index. In which of the following instances would the bias resulting from the unmeasured quality change be least severe?

D. The quality of beef improves and beef becomes more expensive relative to other goods.