Question 1

If everyone buys the same goods every year and the price of housing rises by 38 percent,it is
A) certain the consumer price index (CPI)has increased,and if your nominal wage has risen by less than 38 percent,your real wage has fallen.
B) certain the consumer price index (CPI)has increased,and if your nominal wage has risen by more than 38 percent,your real wage has risen.
C) possible that the consumer price index (CPI)has increased,but it is certain your real wage has fallen.
D) possible that the consumer price index (CPI)has increased; however,it is certain your real wage has risen if,and only if,your nominal wage increased by more than 19 percent because housing accounts for exactly 50 percent of the CPI.
E) not possible to tell what happened to the consumer price index (CPI)because other than for housing,we do not know what happened to the prices of any of the other goods.

Accepted Answer

The answer of If everyone buys the same goods every...

Question 2

Tofu becomes more expensive in 2008 at Safeway/Vons in Laguna Nigel,California.This means
A) the consumer price index (CPI)will rise in 2008 if,and only if,Laguna Nigel is one of the considered 38 geographic locations and tofu is one of the 8,000 goods included in the CPI.
B) the consumer price index (CPI)will almost certainly rise in 2008,even if Laguna Nigel is not included in the index,as long as tofu is included and becomes more expensive on average at the other locations.
C) the consumer price index (CPI)will likely fall (in 2008)if the average weighted price of tofu increases in the United States and the price of tofu at Safeway/Vons makes almost no difference in the CPI.
D) the consumer price index (CPI)might rise or fall (in 2008)and the price of tofu at Safeway/Vons could make a very small difference in the CPI if tofu at Safeway/Vons is included in the index.But because tofu is a relatively large portion of the entire CPI,it is most likely the CPI will rise.
E) tofu,even if included in the consumer price index (CPI)in 2008,would make a small difference on the average weighted price of food and beverages.Food and beverages only constitute a small portion of the CPI,and hence,this would be unlikely to affect the overall CPI by any significant amount.

Accepted Answer

The answer of Tofu becomes more expensive in 2008 at...

Question 3

Oranges become more expensive in 2008 at Ukrop's in Charlottesville,Virginia.This means
A) the consumer price index (CPI)will rise in 2008 if,and only if,Charlottesville is one of the 38 indexed geographic locations and oranges are one of the 8,000 goods included in the CPI.
B) the consumer price index (CPI)will almost certainly rise in 2008,even if Charlottesville is not included,as long as oranges are included and become more expensive on average at the other indexed locations.
C) the consumer price index (CPI)will likely fall if the average weighted price of oranges increases in the United States and the price of oranges at Ukrop's makes almost no difference in the CPI.
D) the consumer price index (CPI)might rise or fall and the price of oranges at Ukrop's could make a very small difference in the CPI if oranges at Ukrop's are included.However,oranges would be a relatively small portion of the entire CPI,if they are included in it at all.
E) orange prices are never included in the consumer price index (CPI)because the creator of the CPI,Milton Marquis,did not like oranges.

Accepted Answer

The answer of Oranges become more expensive in 2008 at...

Question 4

Based on the weight of the consumer price index (CPI),the price of rental housing increases by 15 percent and that of owned housing by 5 percent.During the same year,the price of gasoline falls by 22 percent.We can say that
A) the CPI would definitely fall during the year in question.
B) the CPI would definitely rise during the year in question.
C) all other factors being constant,it is likely the CPI would rise during the year in question.
D) all other factors being constant,it is likely the CPI would fall during the year in question.
E) all other factors being constant,the CPI would change by about 6 percent because that is the average housing change plus the average gasoline change.

Accepted Answer

The weight of rental housing in the CPI is greater than that of owned housing, so the increase in rental housing prices will have a larger impact on the CPI than the increase in owned housing prices. Additionally, the decrease in gasoline prices has a smaller weight in the CPI than housing prices, so it will have a smaller impact. Therefore, all other factors being constant, it is likely that the CPI would rise during the year in question.

Question 5

If 51 percent of all goods in the consumer price index (CPI)became more expensive and 49 percent became cheaper
A) inflation would certainly occur.
B) deflation would most likely occur.
C) inflation or deflation could occur,depending on the weight of these goods in the basket of goods and the actual percentage changes.
D) deflation would certainly occur if the price of housing was one of the goods that fell.
E) inflation would occur if the goods whose prices increased did so by the same percentage as the goods whose prices decreased.

Accepted Answer

The inflation or deflation could occur depending on the weight of these goods in the basket of goods and the actual percentage changes. The CPI is a weighted average of prices of a basket of goods and services, where the weights are determined by the relative cost of each component in the total expenditure of the typical consumer. Therefore, the actual percentage changes and weights of goods in the basket would determine whether overall inflation or deflation would occur. It is not possible to determine the outcome solely based on the percentages provided in the question.

Question 6

According to the consumer price index (CPI),in a particular year,the price of gasoline rises in the United States by 22 percent; simultaneously,the price of all food items falls by 8 percent.Which statement is correct?
A) If gasoline prices rise in more of the 38 geographical locations than those in which it stays the same or falls,the food price changes are irrelevant.
B) This means that the price of gasoline must have increased in more of the 38 geographical locations where the CPI is measured and food prices must have fallen in more of those 38 locations.
C) Based solely on the information given,we cannot conclude what happened to the CPI.
D) This means that the price of gasoline and food rose in every geographic location where the CPI is measured.
E) This means that the price of gasoline and food rose in every place where gasoline and food were sold in the United States during that year.

Accepted Answer

The information only provides data on the price changes of gasoline and food, but it does not give sufficient information to infer what happened to the CPI overall. Without information about the weight of gasoline and food in the CPI basket, it is not possible to infer overall CPI changes based on the price changes of these items alone.

Question 7

What is the difference between the consumer price index (CPI)and the gross domestic product (GDP)deflator?
A) Under normal circumstances,the CPI is the better measure of the overall price level.
B) If inflation is high,the CPI is the better measure of the overall price level; if inflation is low or deflation is occurring,the GDP deflator is the better measure.
C) The GDP deflator is used only during periods of deflation; the rest of the time we use the CPI to measure the overall price level.
D) If we want to examine how price changes affect the overall economy,the GDP deflator is the better measure.
E) The CPI must be equal to the GDP deflator because of the "equation of consumer homogeneity."

Accepted Answer

The main difference between CPI and GDP deflator is that CPI measures the price changes of a fixed basket of goods and services purchased by consumers, while GDP deflator measures the price changes of all goods and services produced domestically. Therefore, if we want to examine how price changes affect the overall economy, GDP deflator is the better measure as it includes all goods and services produced domestically, including those not included in the consumer basket.

Question 8

In Bovania,cattle compose 48 percent of the consumer price index (CPI),housing composes 32 percent,and entertainment accounts for the remaining 20 percent.If,in a certain year,the price of cattle rises by 30 percent and the price of housing rises by 25 percent,then
A) the value of the CPI must rise,no matter what happens to the price of entertainment,because two-thirds of the CPI is more expensive.
B) the CPI has increased,as long as the price of entertainment does not fall by more than 55 percent.
C) the CPI has increased,even if the entertainment in the next year is free.
D) the CPI has decreased if the price of entertainment falls by more than 27.5 percent.
E) it is not possible to tell what would happen to the CPI because it is certain that the goods included in the CPI must change.

Accepted Answer

The answer of In Bovania,cattle compose 48 percent of the...

Question 9

In Bovania,milk constitutes 56 percent of the typical basket of goods for a typical consumer.Let's say the price of milk rises by 4 percent and the prices of all other goods fall by 10 percent.Based on the information given,we can definitely say
A) the consumer price index (CPI)in Bovania is greater than in the previous year.
B) the consumer price index (CPI)in Bovania is less than in the previous year.
C) if consumers get a 4 percent pay raise,they are worse off in terms of their real income compared to inflation as measured by the Bovanian consumer price index (CPI).
D) because milk is a necessity,consumers are automatically worse off no matter what pay increase they may have received.
E) shoe-leather costs have decreased.

Accepted Answer

The overall CPI will decrease because the significant drop in the prices of other goods (which constitute 44% of the basket) outweighs the smaller increase in the price of milk (which constitutes 56% of the basket).

Question 10

If housing prices increase by 25 percent and the price of all other goods decreases by 22 percent,then
A) the consumer price index (CPI)would definitely fall during the year in question because housing prices do not constitute the majority of the CPI.
B) the consumer price index (CPI)would definitely rise during the year in question because housing prices do constitute the majority of the CPI.
C) the consumer price index (CPI)would rise by about 1.5 percent because housing constitutes about half of the market basket in the CPI.
D) because housing spending is considered an investment,the producer price index (PPI)but not the consumer price index (CPI)would be the only price index affected by the change.
E) the consumer price index (CPI)would only be affected in a small way because it includes about 8,000 goods and housing is only one of the 8,000.

Accepted Answer

The answer of If housing prices increase by 25 percent...

Question 11

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
A) 100 in 2002.
B) 108 in 2004.
C) 120 in 2006.
D) at least 118 in 2007.
E) no more than 90 in 2001.

Accepted Answer

The CPI in the base year (2002) is always set to 100.

Question 12

The value of the consumer price index (CPI)is best described as the
A) current year prices to base year prices,holding the market basket content constant.
B) current year prices to base year prices,including changes in the content of the market basket.
C) base year prices to current year prices,holding the market basket content constant.
D) base year prices to current year prices,including changes in the content of the market basket.
E) current year quantity to base year quantity,including changes in the prices of the market basket.

Accepted Answer

The CPI measures the price level of a fixed basket of goods and services over time, so it compares current year prices to base year prices holding the market basket content constant.

Question 13

Chicken becomes more expensive in 2008 at Wegmans in State College,Pennsylvania.This means
A) the consumer price index (CPI)will rise in 2008 if,and only if,State College is one of the 38 geographic locations and chickens are one of the 8,000 goods included in the CPI.
B) the consumer price index (CPI)will almost certainly rise in 2008,even if State College is not included,as long as chicken is included and becomes more expensive on average at the indexed locations.
C) the consumer price index (CPI)will likely fall if the average weighted price of chicken increases in the United States and the price of chicken at Wegmans makes almost no difference in the CPI.
D) the consumer price index (CPI)might rise or fall and the price of chicken at Wegmans could make a very small difference in the CPI if chicken at Wegmans is included in the index.However,chicken would be a relatively small portion of the entire CPI,if it is included at all.
E) chicken prices are never included in the consumer price index (CPI)because the creator of the CPI,James Gapinski,did not like chickens.

Accepted Answer

The answer of Chicken becomes more expensive in 2008 at...

Question 14

In Felixania,cat food constitutes 45 percent of the typical basket of goods for a typical consumer,dog food constitutes 3 percent,and all other goods constitute the remaining 52 percent.Assume the price of cat food rises by 4 percent,the price of dog food falls by 10 percent,and the prices for all other goods remain constant.Based on the information given,we can definitely say
A) because all consumers are the same,all consumers must be worse off as a result of the change.
B) because the goods included in the consumer price index (CPI)necessarily change from year to year,we can't determine the value of the new CPI.
C) if consumers get a 4 percent pay raise,they are worse off in terms of their real income compared to inflation as measured by the Felixanian consumer price index (CPI).
D) if consumers get a 4 percent pay raise,they are better off in terms of their real income compared to inflation as measured by the Felixanian consumer price index (CPI).
E) menu costs have decreased.

Accepted Answer

The price of cat food, which constitutes a large portion of the basket of goods for the typical consumer, has increased by 4 percent but the price of dog food has decreased by 10 percent. Since other goods have remained constant, the overall effect on the CPI will be minimal. Therefore, if consumers receive a 4 percent pay raise, they will be better off in terms of their real income compared to inflation as measured by the Felixanian consumer price index (CPI).

Question 15

The concept of a price index is that it is a(n)
A) measure of how the items included in the typical basket of goods have changed over time; it also includes price changes over time.
B) measure of how the items included in the typical basket of goods have changed over time,while holding price changes constant.
C) measure of how the prices included in the typical basket of goods have changed over time,holding the items in the consumption bundle constant.
D) index of how much gasoline prices have increased,because all prices follow the price of gasoline.
E) index of how much housing prices have changed,because housing is the most important item in the consumption bundle.

Accepted Answer

A price index measures how the prices of a fixed basket of goods and services have changed over time, holding the items in the consumption bundle constant.

Question 16

According to the July 2015 consumer price index (CPI),the top three consumer expenditure categories are,respectively,
A) housing,transportation,and entertainment.
B) transportation,housing,and energy.
C) housing,medical care,and food and beverages.
D) transportation,housing,and medical care.
E) housing,transportation,and food and beverages.

Accepted Answer

The July 2015 consumer price index (CPI) data indicates that the top three consumer expenditure categories are housing, transportation, and food and beverages.

Question 17

If the price of industrial plastic injection molding machines rose by 20 percent and the price of oranges fell by 20 percent,then
A) the consumer price index (CPI)would remain unchanged.
B) the consumer price index (CPI)would rise if oranges had a greater weight.
C) the consumer price index (CPI)would rise because plastic injection molding machines weigh more physically per unit.
D) the consumer price index (CPI)would fall because people buy more oranges than plastic injection molding machines.
E) all else equal,the consumer price index (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.

Accepted Answer

The CPI measures the average change in prices paid by consumers for goods and services. Industrial plastic injection molding machines are not consumer goods, so their price change does not affect the CPI. Only the price change of oranges, a consumer good, would impact the CPI.

Question 18

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
A) would definitely fall during the year in question if,and only if,you buy less of all the goods in question.
B) would definitely rise during the year in question because two of the three goods became more expensive.
C) might rise or fall,contingent on both the quantity of the goods that you bought and the prices of these goods.
D) might rise or fall,contingent only on the quantity of the goods that you bought and regardless of the prices of these goods.
E) 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.

Accepted Answer

The change in the EPI will depend on the change in the quantities of the goods and the change in their prices. It is possible for the EPI to rise if the decrease in the price of one good outweighs the increase in the prices of the other goods, and if the quantities of the goods bought are such that the weighted average price increase is small. Alternatively, the EPI can fall if the increase in the weighted average price is significant and the quantities of the goods bought are such that the weighted average price increase is large. The change in the EPI cannot be determined without information on the specific quantities and price changes of the goods.

Question 19

In Felixania,cat food constitutes 45 percent of the typical basket of goods for a typical consumer,dog food constitutes 3 percent,and all other goods constitute the remaining 52 percent.Assume the price of cat food rises by 4 percent,the price of dog food falls by 10 percent,and prices remain constant for all other goods.Based on the information given,we can definitely say
A) because the price of dog food fell by more than the price of cat food rose,the consumer price index (CPI)must have decreased.
B) the consumer price index (CPI)in Felixania is more than in the previous year.
C) if consumers get a 4 percent pay raise,they are worse off in terms of their real income compared to inflation as measured by the Felixanian consumer price index (CPI).
D) because cat food is a luxury (as is dog food),consumers are certainly no worse off in terms of their real wages as measured by the Felixanian consumer price index (CPI).
E) menu costs have decreased.

Accepted Answer

The CPI is a measure of the average change in prices over time for a basket of goods and services. In this case, the price of cat food, which constitutes 45% of the basket, has increased by 4%, while the price of dog food, which constitutes 3% of the basket, has decreased by 10%. The prices of all other goods, which constitute 52% of the basket, have remained constant. Therefore, the overall CPI must have increased.

Question 20

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 (rounded to one decimal place)
A) 92.3.
B) 106.3.
C) 108.3.
D) 152.0.
E) more than 155.0.

Accepted Answer

The CPI is calculated as (Cost in Current Year / Cost in Base Year) * 100. For 2004, it is ($650 / $600) * 100 = 108.3.

Quiz 21: The Price Level and Inflation

If everyone buys the same goods every year and the price of housing rises by 38 percent,it is

Tofu becomes more expensive in 2008 at Safeway/Vons in Laguna Nigel,California.This means

Oranges become more expensive in 2008 at Ukrop's in Charlottesville,Virginia.This means

Based on the weight of the consumer price index (CPI) ,the price of rental housing increases by 15 percent and that of owned housing by 5 percent.During the same year,the price of gasoline falls by 22 percent.We can say that

If 51 percent of all goods in the consumer price index (CPI) became more expensive and 49 percent became cheaper

According to the consumer price index (CPI) ,in a particular year,the price of gasoline rises in the United States by 22 percent; simultaneously,the price of all food items falls by 8 percent.Which statement is correct?

What is the difference between the consumer price index (CPI) and the gross domestic product (GDP) deflator?

In Bovania,cattle compose 48 percent of the consumer price index (CPI) ,housing composes 32 percent,and entertainment accounts for the remaining 20 percent.If,in a certain year,the price of cattle rises by 30 percent and the price of housing rises by 25 percent,then

In Bovania,milk constitutes 56 percent of the typical basket of goods for a typical consumer.Let's say the price of milk rises by 4 percent and the prices of all other goods fall by 10 percent.Based on the information given,we can definitely say

If housing prices increase by 25 percent and the price of all other goods decreases by 22 percent,then

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

The value of the consumer price index (CPI) is best described as the

Chicken becomes more expensive in 2008 at Wegmans in State College,Pennsylvania.This means

The concept of a price index is that it is a(n)

According to the July 2015 consumer price index (CPI) ,the top three consumer expenditure categories are,respectively,

If the price of industrial plastic injection molding machines rose by 20 percent and the price of oranges fell by 20 percent,then

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