Macro chapter 16

The reference base period for the CPI has an index number of

100

If we compare the last 30 years of inflation as recorded by the CPI and the PCE price index, we find that the

2 measures fluctuate together

You borrow at a nominal interest rate of 10%. If inflation is 4%, the the real interest rate is

6%

Since 1305, of the following centuries the inflation rate has been the highest during the A) 17th century. B) 16th century. C) 20th century. D) 14th century. E) 15th century.

C

Since 1300, the inflation rate has been greater than 2 percent per year and reaching its highest peaks A) primarily before 1400. B) primarily between 1400 and 1500. C) primarily between 1500 and 1700. D) primarily between 1700 and 1900. E) primarily after 1900.

E

The GDP deflator is

a measure of the price level

If higher prices cause buyer to shop at discount stores, the CPI has

an outlet substitution bias

Nominal wage rate is

average hourly wage rate measured in current dollars

CPI is the measure of

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

If we compare the CPI to a perfect cost of living index, we find that they are

different because the CPI uses a fixed basket and has some measurement difficulties

In the past 40 years, nominal interest has ______ real interest in virtually all years.

exceede

If the real interest rate is negative if the inflation rate

exceeds the nominal interest rate

The Consumer Expenditure Survey measures

households spending patterns

The bias in the CPI affects government outlays because the overstatement of inflation

increases government outlays by more than what is justified

Economists agree that the CPI

is a possibly biased measure of the cost of living

The price of dishwashers has remained relatively constant while the quality of dishwashers has improved. The CPI has an upward bias if

it is not adjusted to take account of higher quality

Real interest rate equals

nominal interest rate minus the inflation rate

A change in the real wage rate measures the change in the

quantity of goods and services that an hours work can buy

The % return on a loan expressed in terms of goods and services in the

real interest rate

CPI is calculated by the

Bureau of Labor Statistics

The CPI market basket is determined by

consumer survey

For the CPI to provide an accurate measure of the prices paid by urban consumers, it is necessary to

have a market basket that is consistent and corresponds to what households actually purchase.

According to the historical record of inflation since the 1300s, the inflation rate A) became highest in the twentieth century. B) was at its lowest after Columbus arrived to America. C) was at its highest during the Industrial Revolution. D) has always been consistently high. E) was higher in the 1300s than in the 1900s.

A

For the CPI, the market basket of good and services is modified A) each time the Consumer Expenditures Survey is conducted. B) about every 10 to 20 years. C) each month when the Price Survey is completed. D) each year to reflect changes in consumer purchasing habits. E) at the discretion of the President.

A

The CPI market basket A) weights the goods and services according to the budget of an average urban household. B) determines the best possible way of taxing the average urban household. C) determines how the spending patterns of the average urban household change from month to month. D) determines how spending patterns change from urban household to urban household. E) changes from one month to the next in order to calculate the CPI.

A

When calculating the CPI, the Bureau of Labor Statistics A) weights the price of goods and services in the basket relative to the importance of the average urban household budget. B) sums the prices of the goods and services in the average urban household consumption basket. C) weights the price of all goods and services produced in a year within a country's borders. D) multiplies by 100 the average price of goods and services in the average urban consumer's basket. E) makes certain to weight the goods and services equally so that no one product is over-weighted.

A

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

B

If the prices of the goods and services contained in the CPI market basket increase from the base period to the next year, we know that A) the inflation rate is falling. B) the next year's CPI will be above 100. C) the next year's CPI will be below 100. D) the cost of the CPI market basket at next year's prices is lower than the cost of the CPI market basket at base period prices. E) the market basket used by the BLS must be changed next year to reflect consumers' new expenditures.

B

The CPI market basket A) contains one unit of each good purchased by the average consumer. B) weights the goods and services according to the budget of an average urban household. C) is comprised of a representative sample of the goods that the government guesses people buy. D) includes only goods and not services. E) includes only U.S.-produced goods and services.

B

The inflation rate measures the A) average price of the goods and services consumed by urban consumers. B) percentage change in the CPI from one year to the next year. C) cost of the CPI market basket at current period prices divided by the cost of the CPI market basket at base period prices. D) percentage change in the quantity of goods and services consumed by urban consumers. E) cost of the CPI market basket at base period prices divided by the cost of the CPI market basket at current period prices.

B

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

B

An example of the quality change bias, and not a new goods bias, in the calculation of the CPI is a price increase in A) Coke versus Pepsi. B) DVDs purchased on Craigslist, an online classified website. C) a 2011 GPS unit versus a 2008 GPS unit. D) etexts versus used books . E) pants purchased by a first-time shopper at Aeropostale.

C

The Consumer Price Index (CPI) measures A) the prices of a few consumer goods and services. B) the prices of those consumer goods and services that increased in price. C) the average of the prices paid by urban consumers for a fixed market basket of goods and services. D) consumer confidence in the economy. E) the average of the costs paid by businesses to produce a fixed market basket of consumer goods and services.

C

The presence of new goods that are of higher quality than the old goods leads the BLS to A) update the market basket every time a new good is available. B) do nothing because at least some people still buy the old goods. C) try to separate price differences from improvements in quality. D) actually understate the cost of living when calculating the CPI. E) immediately update the reference base period used in calculating the CPI.

C

The quality change bias is most likely to put ________ into the CPI and so ________ the inflation rate. A) a downward bias; understate B) an upward bias; understate C) an upward bias; overstate D) a downward bias; overstate E) a random bias; randomly overstate or understate

C

Which of the following formulas is used to calculate the inflation rate? A) inflation rate = 100 × B) inflation rate = 100 × C) Inflation rate = 100 × D) Inflation rate = 100 × E) inflation rate = 100 ×

C

Which of the following is NOT a source of bias in the CPI? i. quality change bias ii. new goods bias iii. quantity change bias A) i only B) ii only C) iii only D) i and ii E) ii and iii

C

Comparing CPI and PCE price fluctuations, the

CPI tends to exceed PCE price index.

Constructing the CPI involves which of the following stages? i. conducting the monthly price survey ii. converting the CPI to an international index iii. selecting CPI market basket A) i only B) ii only C) iii only D) i and iii E) i, ii, and iii

D

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

D

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

D

Suppose that residents of France have seen their real wage rate increase over time. This means that

French workers have increased buying power

When conducting the CPI, the BLS has to deal with commodity substitution bias, which is defined as

consumers substitution of cheaper goods for goods whose prices increase

A consequence of CPI bias is that it

distorts private contracts

The CPI is biased because it

does not alwyays take into account the chan ges in product quality

The Consumer Price Index measures the average of the prices paid by urban consumers for a ________ of consumer goods and services.

fixed market basket

The items included in the CPI are

goods and services consumed by the typical urban household

The Consumer Price Index market basket contains

goods and services purchased by an average urban household

In the United States, the good or service given the most weight in the CPI basket when calculating the CPI is

housing

Difference between nominal and real dollars,

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

The CPI bias was estimated by the CAC on the CPI as

overstating the actual inflation rate by about 1% per year

When discussing CPI, the term 'commodity substitution bias' refers to changes in

prices that lead households to change the items they buy

To compare the price of a loaf of bread in 1993 with now, you should compare the value of bread in

real prices

The change in the quantity of goods and services that an hours work can buy is measured by

real wage

What is the good or service is given the most weight in the CPI? A) apparel B) food and beverages C) housing D) transportation E) recreation

C

In the United States between 1971 and 2011, the inflation rate A) increased every year. B) only decreased during the late 1990s. C) only increased during the late 1970s and 1980. D) peaked during the late 1970s and 1980 and was at its generally lowest in the 1990s and 2000s. E) has been relatively constant at approximately 4 percent to 6 percent per year.

D

When economists speak of the CPI bias, they are referring to

the tendency for the CPI to overstate price changes

The fact the consumers substitute one good for another when prices change is

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

the Consumer Price Index measures the average prices paid by

urban consumers for a fixed market basket of goods and services.

If the CPI is used as a cost of living index, incomes that are adjusted to reflect the changes in the CPI will A) increase by more than the actual change in the cost of living. B) decrease by more than the actual change in the cost of living. C) increase by more than the actual change in quantities. D) decrease by more than the actual change in quantities. E) generally rise by about 2 percent a year because the standard of living generally rises by about 2 percent a year.

A

The reference base period that the BLS uses to measure the CPI is A) 1982-1984. B) 1993-1995. C) 1998-2000. D) 1967-1969. E) 2005.

A

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

B

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

B

To measure the CPI, the BLS economic assistants check the prices of A) about 8,000 goods and services every year. B) about 8,000 goods and services every month. C) about 80,000 goods and services every month. D) about 80,000 goods and services every year. E) only the goods and services whose prices have changed every month.

C

To measure the CPI, the BLS economic assistants check the prices of A) all the goods and services produced in a given year. B) some of the consumer goods but none of the services produced in a given year. C) about 80,000 goods and services each month. D) about 80,000 goods and services each quarter. E) only the prices of the goods and services whose prices have changed.

C

Which of the following makes the Consumer Price Index a less accurate measure of the cost of living? i. the monthly price survey conducted to collect information about prices is very unreliable ii. the existence of a new goods bias in the calculation of the CPi iii. the existence of a quality change bias in the calculation of the CPI A) i only B) ii only C) ii and iii D) i and ii E) i, ii, and iii

C

If we look back at inflation data since 1300, we see that A) during the 20th century we have finally solved the problem of high inflation. B) the Industrial Revolution caused the highest inflation rates. C) the discovery of America caused prices to fall drastically. D) inflation has been highest in the 20th and 21st centuries. E) the most rapid inflation occurred prior to 1600.

D

CPI overstates inflation because the average consumer buys

less of those goods whose relative price has risen

Prices of goods and services in the CPI market basket are collected

monthly

The Consumer Price Index (CPI) measures the changes of the

prices paid by consumers for a fixed market basket of consumer goods and services

The period for which the Consumer Price Index is defined to equal 100 is called the

reference base period

Can real interest be negative?

yes