Measuring the cost of living

Chapter 24 : Measuring the cost of living

Section A (MCQ)

1.

The first step in measuring the CPI is to

a.

select the market basket.

b.

conduct a monthly survey.

c.

collect prices for the basket of goods and services.

d.

interview businesses.

2.

If the CPI is 120, this means that

a.

prices are 120 percent higher than in the reference base period.

b.

prices are 0.12 times higher than in the reference base period.

c.

prices are 20 percent higher than in the reference base period.

d.

the inflation rate must be positive.

3.

Which of the following means that the CPI overstates the actual inflation rate?

a.

New goods bias.

b.

Quality change bias.

c.

Outlet substitution bias.

d.

All of the above cause the CPI to overstate inflation.

4.

Economists use the term inflation to describe a situation in which

a.

some prices are rising faster than others.

b.

the economy's overall price level is rising.

c.

the economy's overall price level is high, but not necessarily rising.

d.

the economy's overall output of goods and services is rising faster than the economy's overall price level.

5.

What basket of goods is used to construct the CPI?

a.

A random sample of all goods and services produced in the economy.

b.

The goods and services that are typically bought by consumers as determined by government surveys.

c.

Only food, clothing, transportation, entertainment, and education.

d.

The least expensive and the most expensive goods and services in each major category of consumer expenditures

6.

In the CPI, goods and services are weighted according to

a.

how long a market has existed for each good or service.

b.

the extent to which each good or service is regarded by the government as a necessity.

c.

how much consumers buy of each good or service.

d.

the number of firms that produce and sell each good or service.

7.

Substitution bias in the CPI refers to the fact that the CPI

a.

takes into account the substitution of goods by consumers when relative prices change.

b.

substitutes quality changes whenever they occur without taking account of the cost of the quality changes.

c.

substitutes relative prices for absolute prices of goods.

d.

takes no account of the substitution of goods by consumers when relative prices change.

8.

The goal of the consumer price index is to measure changes in the

a.

costs of production

b.

cost of living.

c.

relative prices of consumer goods.

d.

production of consumer goods.

9.

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

a.

substitution bias

b.

introduction of new goods

c.

unmeasured quality change

d.

unmeasured price change

10.

If the prices of Australian-made shoes imported into the United States increase, then, as a result,

a.

both the GDP deflator and the consumer price index increase.

b.

neither the GDP deflator nor the consumer price index increases.

c.

the GDP deflator increases but the consumer price index does not increase.

d.

the consumer price index will increase, but the GDP deflator will not increase.

Section B (Short answer questions)

  1. Economists and policymakers monitor both the GDP deflator and the consumer price index to gauge how quickly prices are rising. However, these two statistics may not always tell the same story. Discuss two important differences that can cause them to diverge.
  1. Calculate the consumer price index and the rate of inflation if given a fixed basket of goods of 4 hamburgers and 2 apples by taking the year 2001 as the base year.

Year

Price($)

Hamburger

Apple

2001

$1

$0.50

2002

$2

$1.00

2003

$3

$1.50

  1. Describe the three problems that make the consumer price index an imperfect measure of the cost of living.
  2. Convert the salary of Mr. A in the year 1930 to dollars in the year 2000 by using the following information.
    1. A’s salary in the year 1930 was $80,000
    2. The price level in the year 2000 was 160
    3. The price level in the year 1930 was 52

Chapter 25 : Production and Growth

Question 1. What are the facts about living standards and growth rates around the world?

Question 2. Why does productivity matter for living standards?

Question 3. What determines productivity and its growth rate?

Question 4. How can public policy affect growth and living standards?

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