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Exam 6: Measuring the Cost of Living

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Question 101

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Ethel purchased a bag of groceries in 1970 for $8. She purchased the same bag of groceries in 2006 for $25. If the price index was 38.8 in 1970 and the price index was 180 in 2006, then what is the price of the 1970 bag of groceries in 2006 dollars?

A) $5.39
B) $25.00
C) $29.11
D) $37.11

E) A) and D)
F) B) and C)

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Question 102

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The steps involved in calculating the consumer price index and the inflation rate, in order, are as follows:

A) Choose a base year, update the basket, find the prices, estimate the basket's cost, compute the index, and compute the inflation rate.
B) Choose a base year, fix the basket, find the prices, compute the inflation rate, compute the basket's cost, and compute the index.
C) Fix the basket, find the prices, compute the basket's cost, choose a base year and compute the index, and compute the inflation rate.
D) Fix the basket, find the prices, compute the inflation rate, compute the basket's cost, and choose a base year and compute the index.

E) A) and B)
F) All of the above

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Question 103

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If the CPI was 90 in 1975 and is 225 today, then $100 today purchases the same amount of goods and services as

For purposes of calculating the CPI, the housing category of consumer spending includes the cost of

Consternation Corporation has an agreement with its workers to index completely the wage of its employees using the CPI. Consternation Corporation currently pays its production line workers $7.50 an hour and is scheduled to index their wages today. If the CPI is currently 130 and was 125 a year ago, the firm should increase the hourly wages of its workers by

Table 6-6. The table below applies to an economy with only two goods - hamburgers and hot dogs. The fixed basket consists of 4 hamburgers and 8 hot dogs. -Refer to Table 6-6. Between 2009 and 2011, the cost of living increased by

When some dollar amount is automatically corrected for inflation by law or contract, the amount is said to be indexed for inflation.

Jay and Joyce meet George, the banker, to work out the details of a mortgage. They all expect that inflation will be 2 percent over the term of the loan, and they agree on a nominal interest rate of 6 percent. As it turns out, the inflation rate is 5 percent over the term of the loan. a.What was the expected real interest rate? b.What was the actual real interest rate? c.Who benefited and who lost because of the unexpected inflation?

Which of the following is not a widely acknowledged problem with using the CPI as a measure of the cost of living?

If the quality of a good deteriorates from one year to the next while its price remains the same, then the value of a dollar falls.

Between October 2001 and October 2002, the CPI in Canada rose from 116.5 to 119.8 and the CPI in Mexico rose from 93.2 to 102.3. What were the inflation rates for Canada and Mexico over this one-year period?

Scenario 6-4 Quinn has job offers in Wrexington and across the country in Charlieville. The Wrexington job would pay a salary of $50,000 per year, and the Charlieville job would pay a salary of $40,000 per year. The CPI in Wrexington is 150, and the CPI in Charlieville is 90. -Refer to Scenario 6-4. If Quinn only cares about maximizing her purchasing power, then she should

Kristine has a savings account at a bank. If the nominal interest rate she earns exceeds the rate of inflation, then her purchasing power increases over time.

Price indexes allow comparisons of dollar figures over time and provide us a sense of how the economy is changing.

In the CPI, goods and services are weighted according to

The second largest category, by relative importance, in the CPI calculation is

Which of the following is not an example of a price index computed by the Bureau of Labor Statistics?

In addition to the consumer price index, the Bureau of Labor Statistics also calculates the

Changes in the producer price index are often thought to be useful in predicting changes in

When box office receipts are corrected for inflation, the most popular movie of all time is