Econ 2105-Chapter 8 practice test
Let`s say a bottle of Dr. Wells (an actual soft drink still available but hard to obtain) cost $0.15 in 1970. If the consumer price index (CPI) in 1970 was 37.8 and the current CPI is 240, then the inflation-adjusted price of Dr. Wells would be (rounded to the nearest penny):
$0.95
Donna Newton made $0.30 per hour in 1946 at a small restaurant in Clearfield, Pennsylvania. If the consumer price index (CPI) was 18.3 in 1946 and 202.4 in 2011, then Donna`s inflation-adjusted wage would be:
$3.32
The percentage change in any economic variable, including the consumer price index (CPI), is measured by which equation?
(Current Year Previous Year / Previous Year) 100.
The value of the consumer price index (CPI) in 2011 was 229 compared to the base period, which will always have the value of:
100
Suppose that the consumer price index of a country was 160 at Year X and 164 at the end of Year Y. What was the country`s inflation rate during Year Y?
2.5%
It is rare when prices fall in modern times. However, it is likely that they would fall during severe recessions. What year is the most likely for this to have occurred?
2009
As presented in the table, the approximate rate of inflation (or deflation) from 2000-2001 was (rounded to the nearest percent):
21%
Education typically composes about:
3% of the CPI
As presented in the table, the rate of inflation (or deflation) from 2001-2002 was (rounded to two decimal places):
6.67%
As presented in the table, the rate of inflation from 1999-2000 (i.e., during the year 2000) was (rounded to two decimal places):
8.75%
Which of the following reflects a practical example of the price confusion problem?
It is difficult for you to determine whether the long lines at your coffee shop are due to increased demand or because inflation has created too many dollars chasing too few goods.
How do you convert a price of a good from an earlier time into today`s price?
Take the earlier price and multiply by the ration of today's CPI to the earlier CPI.
Inflation is occurring in a nation; the implication(s) of this is/are:
holding nominal wages constant, the real wage would fall.
Deflation is occurring in a nation; the implication(s) of this is/are:Deflation is occurring in a nation; the implication(s) of this is/are:
holding nominal wages constant, the real wage would rise.
Typically the largest percentage category in the consumer price index (CPI) is:
housing
According to the March 2012 consumer price index (CPI), the top three consumer expenditure categories are, respectively:
housing, transportation, and food and beverages.
It has been shown that increases in the money supply are directly related to the rate of inflation. If the previous statement is true, then:
hyperinflation will normally be associated with large increases in the money supply.
Three accuracy problems with the consumer price index (CPI) are:
substitution, quality changes, and the availability of new goods and services.
The agency that measures the consumer price index (CPI) in the United States is:
the Bureau of Labor Statistics
You know that the consumer price index (CPI) at the beginning of this year was 250 and the rate of inflation was 14%; this would mean:
the CPI at the end of the year was 285.
In Bovania, cattle compose 48% of the consumer price index (CPI), housing composes 32%, and entertainment accounts for the remaining 20%. If, in a certain year, the price of cattle rises by 30% and the price of housing rises by 25%, then:
the CPI has increased, even if the entertainment in the next year is free.
If cheeseburgers become more expensive and consumers switch their purchases away from cheeseburgers but the consumer price index (CPI) still assumes they buy the same amount, then:
the CPI will reflect upward bias.
If your nominal wage rises but you think that it automatically means your real wage rose, then:
you are suffering from money illusion.
Suppose a basket of goods and services has been selected to calculate the consumer price index (CPI) and 2002 has been chosen as the base year. In 2002, the basket`s cost was $76.00; in 2004, the basket`s cost was $79.50; and in 2006, the basket`s cost was $85.00. The value of the CPI was:
100 in 2002
Suppose a basket of goods and services has been selected to calculate the consumer price index (CPI) and 2002 has been selected as the base year. In 2002, the basket`s cost was $600; in 2004, the basket`s cost was $650; and in 2006, the basket`s cost was $700. The value of the CPI in 2004 was (round to one decimal place):
108.3
Based on the figure, and if we define inflation as being under control at rates less than 10%, when was inflation under control?
1997-2003, 2005-2011
According to the consumer price index (CPI), in a particular year, the price of gasoline rises in the United States by 22%; simultaneously, the price of all food items falls by 8%. Which statement is correct?
Based solely on the information given, we cannot conclude what happened to the CPI.
Consider a nation in which the price index was 150 last year and this year it is 130. Which statement is correct?
Deflation was 13.33% this year.
Donna Newton made $0.30 per hour in 1946 at a small restaurant in Clearfield, Pennsylvania. If the consumer price index (CPI) was 18.3 in 1946 and 202.4 in 2011 and the legal minimum wage in 2011 was $7.25, then:
Donna`s inflation-adjusted wage would be less than the legal minimum wage in 2011.
What is the difference between the consumer price index (CPI) and the gross domestic product (GDP) deflator?
If we want to examine how price changes affect the overall economy, the GDP deflator is the better measure.
Your nominal wage increases by 10%, and the overall price level increases by 12%. Which statement is correct?
If you feel richer, you are experiencing money illusion.
Michael Chang buys only tennis rackets during a particular year. During the year in question, the price of all goods rises by 10% on average, but the price of tennis rackets remains the same. Which statement is correct?
Michael does not experience inflation because he only buys tennis racquets.
In Nation A, the price index rises from 110 to 120 in a particular year. In the same year, the price level rises from 120 to 130 in Nation B. This means:
Nation A is experiencing inflation of less than 9.3% and Nation B is experiencing inflation of less than 8.5%.
If Robert was earning $10,000 and now earns $11,500, then:
Robert could suffer from money illusion if prices increase by 15% or more.
You own a store and have not raised prices recently and now your store has more customers. Which statement is correct?
This can be troublesome because you face a price confusion problem: You don`t know if the extra business means that you should open another store, or if the crowds are a result of inflation, which has caused all consumers to buy at a faster rate.
In 1940 you could buy a ``nickel Pepsi`` for (oddly enough) a nickel. If the price index in 1940 was 14 and the 2011 price index was 221, then the inflation-adjusted price of a Pepsi would be:
about 79 cents ($0.79)
The price of a McDonald`s hamburger in 1955 was $0.15 when the price index was 27; if in 2011, it was $0.89 when the price index was 220, then the inflation-adjusted price of a McDonald`s hamburger in 2011 was:
a bit higher than 2011`s actual price (1-1.99 times as much).
Based on the weight of the consumer price index (CPI), the price of rental housing increases by 15% and that of owned housing by 5%. During the same year, the price of gasoline falls by 22%. We can say that:
all other factors being constant, it is likely the CPI would rise during the year in question.
The chained consumer price index (CPI) is a better measure of prices than the traditional CPI:
because it adjusts for price changes more often, especially when new goods are introduced, which is important because new products' prices tend to fall soon after introduction.
The signing of long-term wage and price agreements and the relationship to inflation most likely raises the issue of:
future price uncertainty.
You have to pay costs for your business now but you also have to enter into long-term contracts to repay loans in the future. If inflation occurs, the best term for the problem that occurs in this case is:
future price uncertainty.
In Felixania, cat food constitutes 45% of the typical basket of goods for a typical consumer, dog food constitutes 3%, and all other goods constitute the remaining 52%. Assume the price of cat food rises by 4%, the price of dog food falls by 10%, and the prices for all other goods remain constant. Based on the information given, we can definitely say:
if consumers get at 4% pay raise, they are better off in terms of their real income compared to inflation as measured by the Felixanian CPI.
According to the figure, deflation was occurring:
in none of the years shown
Referring to the figure, we can observe that:
inflation seemes to stabalize in the early years, 1996 and 1999, but it then spiked between 2002 and 2004
If everyone buys the same goods every year and the price of housing rises by 38%:
it is not possible to tell what happened to the CPI because other than for housing, we do not know what happened to the prices of any of the other goods.
Joe Kowalski invents a new product, and this new product becomes cheaper over time. This can be problematic because:
it is unlikely the CPI will include Joe`s new product immediately, even if it is a consumer good.
As a business owner, you find that your resource prices are increasing often. Because these costs are rising, you find it necessary to change your prices frequently. This best describes:
menu costs.
The chained consumer price index (CPI) tends to more accurately reflect prices by updating the consumer basket of goods:
monthly
If real income increases, then:
nominal income rises faster than prices.
The textbook shows that the inflation-adjusted movie receipts for Star Wars (released 1977) were $1,410,707,000 and the original receipts were $460,998,000. The implication is that:
prices today are about 33% of what they were in 1977.
If nominal income increases, then:
real income increases if the price index falls.
Inflation creates uncertainty because:
real interest rates, prices, and wages are unknown.
If the price of a typical market basket of goods increased from about $20 in 1960 to $200 in early 2012, then it
rose by 10-fold from 1960 until early 2012.
If the price of industrial plastic injection molding machines rose by 20% and the price of oranges fell by 20%, then:
the CPI would fall by the weighted value of oranges in the CPI, but because industrial plastic injection molding machines are not a consumer good, they would not affect the CPI.
In Bovania, milk constitutes 56% of the typical basket of goods for a typical consumer. Let`s say the price of milk rises by 7% and the prices of all other goods fall by 4%. Based on the information given, we can definitely say:
the consumer price index (CPI) in Bovania is greater than in the previous year.
If people bought the same market basket of goods as the average consumer again and again:
the consumer price index (CPI) would be extremely accurate.
In a particular nation, people buy a completely unique and different set of goods and services every year. None of the goods purchased in the new year are the same as any of the goods purchased in the previous year. Based on this information
the consumer price index (CPI) would be meaningless in this nation.
If housing prices increase by 25% and the price of all other goods decreases by 22%, then:
the consumer price index (CPI) would definitely fall during the year in question because housing prices do not constitute the majority of the CPI.
The value of the consumer price index (CPI) is best described as
the current year prices to base year prices, holding the market basket content constant.
A price confusion problem is best described as:
the difficulty producers have in determining whether higher prices are due to increased demand or inflation.
If a Hershey`s chocolate bar cost $0.05 in 1921 when the price index was 18 and the same size and weight Hershey`s chocolate bar cost $0.05 in 1955 when the price index was 27, then:
the inflation-adjusted price of the bar would be much higher than the actual price for both years.
According to the price confusion problem, if the price of a product increases, then:
the market demand has increased, and the firm`s output should increase.
If your real wage rose but your nominal wage fell, this would imply that:
the overall price level has fallen more than your nominal wage.
Assume the price of salt increased from $0.30 in 1985 to $0.50 in 1995. If we calculate the average rate of price increase for salt over this period, we could accurately say:
the price of salt increased at about a 5% rate per year during this period.
Typically if real wages fall, the quantity demanded of labor rises. If workers agree to 3% wage increases for a four-year period and inflation is more than 3%, then, based on this information alone:
the quantity demanded of labor will increase, because real wages fell.
Inflation can create uncertainty by making:
the real value of future payments uncertain.
If the goods producers buy change dramatically between years, then:
this would be reflected in the GDP deflator but not the CPI.
Assume tuition at the University of Virginia cost $2,962 (per semester) in 2004 and $11,584 in 2012. If the price index was 184 in 2004 and 226 in 2012, then we could say:
tuition has increased much more rapidly than inflation.
Inflation occurs:
when the overall price level rises
Deflation is best described as:
when the overall prices of goods falls
Deflation:
will make you better off if your nominal wages fall more slowly than prices.
The ratio of Price in an Earlier Time / Price in Today`s Time:
would be used to convert today`s price to an earlier price adjusting for inflation.
Deflation:
would negatively affect producers but positively affect consumers because producers must accept lower prices
You are offered two jobs, one in Chicago paying $67,000 and one in Dallas paying $58,000. The price index in Chicago is 110.8, and in Dallas it is 91.5. If real wages are the only consideration, then:
you would definitely take the job in Dallas because the real wage is higher there.
You are offered two jobs, one in Chicago paying $67,000 and one in Philadelphia paying $79,000. The price index in Chicago is 110.8, and in Philadelphia it is 126.5. If real wages are the only consideration, then:
you would definitely take the job in Philadelphia because the real wage is higher there.
Your entertainment price index (EPI) was computed based on three goods: movie tickets, popcorn, and limeade. If you change the quantity of these goods from this year to next year and the prices of two of the three goods increase while the other price falls, then:
your EPI might rise or fall, contingent only on the percentage of the market basket that these goods constituted and the percentage that each good occupied within the basket, regardless of the quantity change from year to year.
Your firm expands its output in a time when demand appears to be increasing. Demand for all goods is increasing because of inflation, and consumers want to buy all goods faster because their real purchasing power is falling due to inflation. This situation could indicate that:
your firm experienced a price confusion problem.
In Las Vegas, the cost of living index is 110, and in San Francisco, it is 170. You work in Las Vegas currently and your salary is $57,000. You are offered a promotion and pay raise of $70,000 to move to San Francisco. If you take the promotion:
your nominal wage increased but your real wage has decreased.
