Deck 18: Measuring the Price Level and Inflation

Question 1

The consumer price index for Planet Econ consists of only two items: books and hamburgers. In 2015, the base year, the typical consumer purchased 10 books for $25 each and 25 hamburgers for $2 each. In 2017, the typical consumer purchased 15 books for $30 each and 30 hamburgers for $3 each. The consumer price index for 2017 on Planet Econ equals:

A)1.00
B)1.15
C)1.25
D)1.45

Answer 1

1.25

Question 2

The typical family on the Planet Econ consumes 10 pizzas, 7 pairs of jeans, and 20 gallons of milk. In 2016, pizzas cost $10 each, jeans cost $40 per pair, and milk cost $3 per gallon. In 2017, the price of pizzas increased to $14 each, while the price of jeans and milk remained the same. Between 2016 and 2017, a typical family's cost of living:

A)increased by 9 percent.
B)decreased by 9 percent.
C)remained the same.
D)increased by 40 percent.

Answer 2

increased by 9 percent.

Question 3

A consumer expenditure survey reports the following information on consumer protein spending:  
Using 2016 as the base year, by how much does a "cost of protein" index increase between 2016 and 2017?

A)5.2 percent
B)8.6 percent
C)13.4 percent
D)14.3 percent

Answer 3

13.4 percent

Question 4

The consumer price index measures the cost of:

A)a fixed basket of goods and services.
B)a changing basket of goods and services.
C)all goods and services purchased by consumers.
D)goods and services required to live above the poverty level.

Question 5

If the total expenditures of a typical family equaled $40,000 per year in 2015 and the exact same basket of goods and services cost $45,000 in the year 2017, the family's cost of living:

A)increased by 11.1 percent.
B)decreased by 11.1 percent.
C)decreased by 12.5 percent.
D)increased by 12.5 percent.

Question 6

If the consumer price index decreased from 1.66 to 1.59, then it must be the case that ________ relative to prices in the base year.

A)all prices fell
B)the weighted average level of prices rose
C)the weighted average level of prices fell
D)some prices rose and some prices fell

Question 7

Suppose that the total expenditures for a typical household in 2015 equaled $5,500 per month, while the cost of purchasing exactly the same items in 2017 was $6,875. If 2015 is the base year, the CPI for the year 2017 equals:

A)0.80
B)1.00
C)1.20
D)1.25

Question 8

The typical family on the Planet Econ consumes 10 pizzas, 7 pairs of jeans, and 20 gallons of milk. In 2016, pizzas cost $10 each, jeans cost $40 per pair, and milk cost $3 per gallon. In 2017, the price of pizzas went down to $8 each, while the prices of jeans and milk remained the same. Between 2016 and 2017, a typical family's cost of living:

A)increased by 4.5 percent.
B)decreased by 4.5 percent.
C)remained the same.
D)decreased by 20 percent.

Question 9

The CPI is a measure of the:

A)real wage.
B)price of a specific good or service.
C)rate of inflation.
D)average level of prices relative to prices in the base year.

Question 10

A measure of the average price of a given class of goods or services relative to the price of the same goods and services in a base year is called a:

A)real price.
B)real quantity.
C)rate of inflation.
D)price index.

Question 11

Suppose that the total expenditures for a typical household in 2015 equaled $2,500 per month, while the cost of purchasing exactly the same items in 2017 was $3,000. If 2015 is the base year, the CPI for 2017 equals:

A)0.83
B)1.00
C)1.20
D)1.25

Question 12

The consumer price index for the current year measures the cost of a standard basket in the ________ year relative to the cost of the same basket in the ________ year.

A)current; base
B)current; current
C)base; index
D)base; current

Question 13

A CPI that equals 1.34 in 2016 (when 2010 is the base year)means that:

A)prices in 2016 are 34 percent higher than in 2015.
B)the CPI equals $1.34 in 2016.
C)the inflation rate in 2016 is 134 percent.
D)the average level of prices is 34 percent higher in 2016 than in the base year.

Question 14

Suppose that the total expenditures for a typical household in 2015 equaled $2,500 per month, while the cost of purchasing exactly the same items in 2017 was $3,000. If 2015 is the base year, the CPI for 2015 equals:

A)0.83
B)1.00
C)1.20
D)1.25

Question 15

The CPI is all of the following EXCEPT the:

A)rate of inflation between the current period and the base year.
B)cost of living relative to the base year.
C)average level of prices relative to prices in the base year.
D)consumer price index.

Question 16

The consumer price index for Planet Econ consists of only two items: books and hamburgers. In 2015, the base year, the typical consumer purchased 10 books for $20 each and 200 hamburgers for $1 each. In 2017, the typical consumer purchased 12 books for $23 each and 300 hamburgers for $1.15 each. The consumer price index for 2017 on Planet Econ equals:

A)1.00
B)1.15
C)1.25
D)1.45

Question 17

A consumer expenditure survey reports the following information on entertainment spending:  
Using 2015 as the base year, by how much does a "cost of entertainment" index increase between 2015 and 2016?

A)3.9 percent
B)8.6 percent
C)13.4 percent
D)29.4 percent

Question 18

If the consumer price index increased from 1.52 to 1.65, then it must be the case that ________ relative to prices in the base year.

A)all prices rose
B)the weighted average level of prices rose
C)all prices fell
D)some prices rose and some prices fell

Question 19

If the total expenditures of a typical family equaled $35,000 per year in 2015 and the exact same basket of goods and services cost $40,000 in the year 2017, the family's cost of living:

A)increased by 14 percent.
B)decreased by 12.5 percent.
C)decreased by 14 percent.
D)increased by 12.5 percent.

Question 20

The measure of the cost of a standard basket of goods and services in any period relative to the cost of the same basket of goods and services in the base year is called the:

A)consumption cost calculator.
B)consumption production index.
C)consumer production index.
D)consumer price index.

Question 21

In 1929, the CPI equaled 0.171 and in 1930, the CPI equaled 0.167. These data provide evidence of a period of:

A)inflation.
B)deflation.
C)trade deficit.
D)expansion.

Question 22

The CPI in year one equaled 1.55. The CPI in year two equaled 1.64. The rate of inflation between years one and two was ________ percent.

A)4.0
B)5.8
C)6.4
D)9.0

Question 23

The CPI in 1974 equaled 0.49. The CPI in 1975 equaled 0.54. The rate of inflation between 1974 and 1975 was ________ percent.

A)5.0
B)5.4
C)9.3
D)10.2

Question 24

If the CPI equaled 1.43 in 2008 and 1.56 in 2009, then between 2008 and 2009 there was:

A)inflation.
B)deflation.
C)a recession.
D)an expansion.

Question 25

A measurement in terms of current dollar value is called a(n)________ quantity.

A)nominal
B)real
C)deflated
D)indexed

Question 26

Which of the following is a real quantity?

A)The current wages paid to factory workers
B)The cost of a new car
C)The number of tons of steel produced in 2005
D)The current price of a barrel of oil

Question 27

Which of the following is a nominal quantity?

A)The number of people unemployed
B)The current price of a barrel of oil
C)The number of cars produced in 2017
D)The amount of coal mined in one month

Question 28

Inflation is a measure of the ________ of prices; the CPI is a measure of the ________ of prices.

A)current level; rate of change in the level
B)rate of change in the level; current level
C)index; base year's level
D)base year's level; index

Question 29

A nominal quantity is measured:

A)in physical terms.
B)in terms of current dollar value.
C)using the consumer price index.
D)by indexing.

Question 30

The annual percentage rate of change in the price level is the:

A)relative price.
B)Fisher effect.
C)cost of living.
D)inflation rate.

Question 31

The CPI in 1930 equaled 0.17. The CPI in 1931 equaled 0.15. The rate of inflation between 1930 and 1931 was ________ percent.

A)-13.3
B)-11.8
C)1.5
D)11.8

Question 32

A price index measures:

A)the price of specific good or service.
B)the change in the price of a specific good or service.
C)only the prices that change.
D)the average price of a given class of goods or services relative to the price of the same goods and services in a base year.

Question 33

A real quantity is a quantity measured:

A)in physical terms.
B)in terms of current dollar value.
C)by the average quantity.
D)using real prices.

Question 34

Deflation is a situation in which the:

A)quantity of goods and services produced is increasing over time.
B)quantity of goods and services produced is decreasing over time.
C)prices of most goods and services are falling over time.
D)prices of most goods and services are rising over time.

Question 35

The ________ is the rate of change of the ________.

A)base year price index; current year price index
B)current year price index; base year price index
C)CPI; rate of inflation
D)rate of inflation; CPI

Question 36

All of the following are nominal quantities except the:

A)price of a new car.
B)wages paid to workers at a restaurant.
C)cost of purchasing a new computer.
D)number of houses built in one month.

Question 37

The CPI in 1931 equaled 0.15. The CPI in 1932 equaled 0.14. The rate of inflation between 1931 and 1932 was ________ percent.

A)-7.1
B)-6.7
C)1.4
D)6.7

Question 38

The inflation rate can be calculated as the percentage change in:

A)real GDP.
B)nominal GDP.
C)the CPI.
D)the exchange rate.

Question 39

The CPI in year one equaled 1.45. The CPI in year two equaled 1.51. The rate of inflation between years one and two was ________ percent.

A)4.0
B)4.1
C)4.5
D)6.0

Question 40

The situation when the price of most goods and services are falling over time is called:

A)inflation.
B)disinflation.
C)a boom.
D)deflation.

Question 41

The wage paid to workers measured in terms of real purchasing power is called the:

A)nominal wage.
B)cost of living.
C)minimum wage.
D)real wage.

Question 42

The price of a gallon of gasoline at the pump increased by 10 percent at the same time that the inflation rate was 5 percent. The nominal price of gasoline ________, and the real price of gasoline ________.

A)increased; increased
B)increased; decreased
C)increased; did not change
D)decreased; increased

Question 43

The price of a gallon of gasoline at the pump increased by 10 percent at the same time that the inflation rate was 15 percent. The nominal price of gasoline ________, and the real price of gasoline ________.

A)increased; also increased
B)increased; decreased
C)increased; did not change
D)decreased; increased

Question 44

One family earned an income of $28,000 in 1995. Over the next five years, their income increased by 15 percent, while the CPI increased by 12 percent. After five years, this family's nominal income ________, and their real income ________.

A)decreased; decreased
B)decreased; increased
C)increased; did not change
D)increased; increased

Question 45

The price of a gallon of gasoline was $1.35 in 2000 when the CPI equaled 1.68. The cost of a gallon of gasoline was $2.38 in 2016 when the CPI equaled 2.40. The real cost of a gallon of gasoline between 2000 and 2016:

A)increased.
B)decreased.
C)remained constant.
D)may have either increased or decreased.

Question 46

If workers received a 5 percent wage increase and the rate of inflation was 3 percent, then their real wage:

A)increased.
B)decreased.
C)remained constant.
D)equaled the nominal wage.

Question 47

A college graduate in 1972 found a job paying $7,200. The CPI was 0.418 in 1972. A college graduate in 2016 found a job paying $35,000. The CPI was 2.40 in 2016. The 1972 graduate's job paid ________ in nominal terms and ________ in real terms than the 2016 graduate's job.

A)more; less
B)more; more
C)less; more
D)less; less

Question 48

A quantity measured in physical terms is called a ________ quantity.

A)nominal
B)relative
C)real
D)current

Question 49

A college graduate in 1972 found a job paying $7,200. The CPI was 0.418 in 1972. A college graduate in 2016 found a job paying $60,000. The CPI was 2.40 in 2016. The 1972 graduate's job paid ________ in nominal terms and ________ in real terms than the 2016 graduate's job.

A)more; less
B)more; more
C)less; more
D)less; less

Question 50

To compare the purchasing power of nominal wages in two different years, one must:

A)compare the nominal values.
B)deflate both quantities by a common price index.
C)increase both quantities by the same percentage increase in a price index.
D)adjust both quantities by the real interest rate.

Question 51

Deflating a nominal quantity is the process of dividing a ________ quantity by a ________ in order to express the quantity in ________ terms.

A)nominal; real quantity; nominal
B)real; nominal quantity; real
C)nominal; price index; real
D)real; price index; nominal

Question 52

To correct a nominal quantity for changes in the price level, one should:

A)add a price index to it.
B)subtract a price index from it.
C)divide it by a price index.
D)multiply it by a price index.

Question 53

If workers received a 5 percent wage increase and the rate of inflation was 10 percent, then their real wage:

A)increased.
B)decreased.
C)remained constant.
D)equaled the nominal wage.

Question 54

If the CPI equaled 1.00 in 2005 and 1.65 in 2015 and a typical household's income equaled $35,000 in 1995 and $40,000 in 2005, then between 2005 and 2015, real household income:

A)increased.
B)decreased.
C)was constant.
D)may have either increased or decreased.

Question 55

A year's tuition at a state university cost $250 in 1972 when the CPI equaled 0.418. The cost of a year's tuition at the same state university cost $8,000 in 2016 when the CPI equaled 2.40. The real cost of tuition between 1972 and 2016:

A)increased.
B)decreased.
C)remained constant.
D)may have either increased or decreased.

Question 56

The price of a gallon of gasoline at the pump increased by 5 percent at the same time that the inflation rate was also 5 percent. The nominal price of gasoline ________, and the real price of gasoline ________.

A)did not change; increased
B)did not change; did not change
C)increased; did not change
D)increased; decreased

Question 57

The real wage is the wage:

A)measured in current dollars.
B)required to maintain a minimum standard of living.
C)employers are required to pay workers.
D)measured in terms of purchasing power.

Question 58

The process of dividing a nominal quantity by a price index in order to express the quantity in real terms is called:

A)deflating.
B)negative inflation.
C)indexing.
D)depressing.

Question 59

One family earned an income of $28,000 in 1995. Over the next five years, their income increased by 15 percent, while the CPI increased by 15 percent. After five years, this family's nominal income ________, and their real income ________.

A)decreased; also decreased
B)decreased; increased
C)increased; did not change
D)increased; also increased

Question 60

All of the following are real quantities except the:

A)number of new cars produced in one year.
B)tons of steel shipped to South America.
C)millions of computer chips shipped to computer makers.
D)billions of dollars invested in stocks.

Question 61

A labor contract provides for a first-year wage of $10 per hour, and specifies that the real wage will rise by 3 percent in the second year of the contract. The CPI is 1.00 in the first year and 1.07 in the second year. What dollar wage must be paid in the second year?

A)$10.30
B)$10.70
C)$10.90
D)$11.02

Question 62

If you wish to maintain a constant purchasing power when you retire, you should choose retirement income options that are:

A)deflated.
B)nominal.
C)indexed.
D)inflated.

Question 63

A labor contract provides for a first-year wage of $15 per hour, and specifies that the real wage will rise by 2 percent in the second year of the contract and by another 2 percent in the third year. The CPI is 1.00 in the first year, 1.09 in the second year, and 1.15 in the third year. What dollar wage must be paid in the third year?

A)$15.00
B)$15.61
C)$17.24
D)$17.95

Question 64

A labor contract provides for a first-year wage of $10 per hour, and specifies that the real wage will rise by 3 percent in the second year of the contract and by another 3 percent in the third year. The CPI is 1.00 in the first year, 1.07 in the second year, and 1.15 in the third year. What dollar wage must be paid in the third year?

A)$10.61
B)$11.15
C)$12.20
D)$12.31

Question 65

Indexing is the process of:

A)dividing a real quantity by a price index.
B)dividing a nominal quantity by a price index.
C)increasing a nominal quantity by an amount equal to the percentage change in a price index.
D)increasing a real quantity by an amount equal to the percentage change in a price index.

Question 66

Suppose the CPI does indeed overstate the inflation rate. When the CPI increases by 5 percent and household incomes increase by 5 percent, we should conclude that real incomes of households have:

A)increased.
B)stayed constant.
C)decreased.
D)increased more slowly than has inflation.

Question 67

Because the minimum wage is not indexed to inflation, when there is inflation the nominal minimum wage ________, and the real minimum wage ________.

A)remains constant; decreases
B)remains constant; remains constant
C)decreases; remains constant
D)increases; decreases

Question 68

The practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index is called:

A)a substitution bias.
B)the Fisher effect.
C)deflating.
D)indexing.

Question 69

Suppose manufacturers introduce a new model car to replace a car currently included in the CPI basket. The price of the new car is 10 percent higher than the discontinued model, but the new car has additional safety features and amenities. In this situation the CPI will tend to ________ inflation as a result of ________ bias.

A)overstate; substitution
B)understate; quality adjustment
C)accurately measure; substitution
D)overstate; quality adjustment

Question 70

Two methods used to adjust nominal values for inflation are:

A)substituting and complementing.
B)indexing and deflating.
C)aggregating and disaggregating.
D)real and nominal.

Question 71

If workers received a 5 percent wage increase and the rate of inflation was 5 percent, then their real wage:

A)increased.
B)decreased.
C)remained constant.
D)equaled the nominal wage.

Question 72

The process of converting current dollar values into real terms is called ________, while the process of adjusting nominal quantities to maintain their purchasing power is called ________.

A)deflation; inflation
B)inflation; hyperinflation
C)deflating; indexing
D)indexing; deflating

Question 73

A report indicated that the average real wage in manufacturing declined by 2 percent between 1990 and 2000. If the CPI equaled 1.30 in 1990, 1.69 in 2000, and the average nominal wage in manufacturing was $35 in 2000, what was the average nominal wage in manufacturing in 1990?

A)$21.13
B)$26.40
C)$26.92
D)$27.47

Question 74

To ensure that your salary maintains its real purchasing power from year to year, your nominal salary must be:

A)deflated.
B)indexed.
C)aggregated.
D)hyperinflated.

Question 75

A labor contract provides for a first-year wage of $15 per hour, and specifies that the real wage will rise by 2 percent in the second year of the contract. The CPI is 1.00 in the first year and 1.09 in the second year. What dollar wage must be paid in the second year?

A)$15.30
B)$16.09
C)$16.45
D)$16.68

Question 76

To ensure that a nominal payment represents a constant level of purchasing power over time, one should:

A)add the price index to it.
B)subtract the price index from it.
C)divide it by the price index.
D)increase it by a percentage equal to the rate of inflation for that year.

Question 77

The CPI equals 1.00 in year one and 1.15 in year two. If the nominal wage is $15 in year one and a contract calls for the wage to be indexed to the CPI, what will be the nominal wage in year two?

A)$15.00
B)$16.15
C)$17.25
D)$22.50

Question 78

The CPI equals 1.00 in year one and 1.05 in year two. If the nominal wage is $15 in year one and a contract calls for the wage to be indexed to the CPI, what will be the nominal wage in year two?

A)$14.29
B)$15.00
C)$15.75
D)$16.05

Question 79

A factory worker earned $10 an hour in 1980. The CPI was 0.82 in 1980. The same factory worker was earning $15 an hour in 1990 when the CPI was 1.31. From 1980 to 1990, the factory worker's hourly real wage:

A)increased from $7.63 to $18.29.
B)decreased from $12.20 to $11.45.
C)remained constant.
D)increased from $10 to $15.

Question 80

When statisticians fail to take into account improvements in the quality of goods and services, the CPI will tend to ________ the rate of inflation.

A)understate
B)precisely measure
C)be unrelated to
D)overstate