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Review Quiz 6


Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
 

 1. 
The consumer price index is used to
a.
differentiate gross national product from net national product.
b.
turn dollar figures into meaningful measures of purchasing power.
c.
characterize the types of goods and services that consumers purchase.
d.
measure the quantity of goods and services that the economy produces.
 

 2. 
The economy's inflation rate is the
a.
price level in the current period.
b.
change in the price level from the previous period.
c.
change in the gross domestic product from the previous period.
d.
percentage change in the price level from the previous period.
 

 3. 
The CPI is a measure of the overall cost of
a.
inputs purchased by a typical producer.
b.
goods and services bought by a typical consumer.
c.
goods and services produced in the economy.
d.
stocks on the New York Stock Exchange.
 

 4. 
The market basket used to calculate the CPI in Aquilonia is 4 loaves of bread, 6 gallons of milk, 2 shirts and 2 pants. In 2005, bread cost $1.00 per loaf, milk cost $1.50 per gallon, shirts cost $6.00 each and pants cost $10.00 per pair. In 2006, bread cost $1.50 per loaf, milk cost $2.00 per gallon, shirts cost $7.00 each and pants cost $12.00 per pair. Using 2005 as the base year, what was Aquilonia’s inflation rate in 2006?
a.
30 percent
b.
24.4 percent
c.
21.6 percent
d.
It is impossible to determine without knowing the base year.
 

 5. 
For any given year, the CPI is the price of the basket of goods and services in the
a.
given year divided by the price of the basket in the base year, then multiplied by 100.
b.
given year divided by the price of the basket in the previous year, then multiplied by 100.
c.
base year divided by the price of the basket in the given year, then multiplied by 100.
d.
previous year divided by the price of the basket in the given year, then multiplied by 100.
 

 6. 
The inflation rate is calculated
a.
using the national income accounts.
b.
by adding up the price increases of all goods and services.
c.
by computing a simple average of the price increases for all goods and services.
d.
by determining the percentage increase in the price index from the preceding period.
 

 7. 
If the cost of medical care increases by 50 percent, then, other things the same, the CPI is likely to increase by about
a.
3 percent.
b.
6 percent.
c.
9 percent.
d.
18 percent.
 

 8. 
Which of the following is an acknowledged problem of the consumer price index (CPI) as a measure of the cost of living?
a.
The CPI fails to measure all changes in the quality of goods.
b.
The CPI displays a housing bias.
c.
The CPI accounts for changes in prices of some goods, but prices of certain goods are assumed to remain constant.
d.
All of the above are correct.
 

 9. 
To which of the problems in the construction of the CPI is the creation of the mobile phone most relevant?
a.
substitution bias
b.
introduction of new goods
c.
unmeasured quality change
d.
income bias
 
 
Scenario 24-1
Grant Smith was a doctor in 1944 and earned $12,000 that year. His daughter, Lisa Smith, is a doctor today and she earned $210,000 in 2005. The price index in 1944 was 17.6 and the price index in 2005 was 184.
 

 10. 
Refer to Scenario 24-1. Lisa Smith’s 2005 income in 1944 dollars is about
a.
$20,087.
b.
$24,667.
c.
$31,022.
d.
$36,556.
 

 11. 
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 was 180 in 2006, what is the price of a 1970 bag of groceries in 2006 prices?
a.
$25.00
b.
$29.11
c.
$37.11
d.
$43.22
 

 12. 
When box office receipts are corrected for inflation, the No. 1 movie of all time is
a.
Star Wars: The Phantom Menace.
b.
Spiderman.
c.
Gone With the Wind.
d.
The Sound of Music.
 

 13. 
Indexation refers to
a.
a process of adjusting the nominal interest rate so that it is equal to the real interest rate.
b.
using a law or contract to automatically correct a dollar amount for the effects of inflation.
c.
using a price index to deflate dollar values.
d.
an adjustment made by the Bureau of Labor Statistics to the CPI so that the index is in line with the GDP deflator.
 

 14. 
Social Security payments are indexed for inflation using the CPI. A recent newspaper editorial claimed that Social Security recipients are harmed by years of low inflation because they do not receive as large an increase in their payments as they do in years of high inflation. Which of the following statements is correct?
a.
The newspaper editorial is correct under all circumstances.
b.
The newspaper editorial is correct if the market basket consumed by Social Security recipients is the same as the market basket used to compute the CPI.
c.
The newspaper editorial is correct if the prices of the goods consumed by Social Security recipients increase faster than the prices of the goods in the market basket used to compute the CPI.
d.
The newspaper editorial is correct if the prices of the goods consumed by Social Security recipients increase more slowly than the prices of the goods in the market basket used to compute the CPI.
 

 15. 
Ms. Smith borrowed $1,000 from her bank for one year at an interest rate of 10 percent. During that year the price level went up by 15 percent. Which of the following statements is correct?
a.
Ms. Smith will repay the bank fewer dollars than she initially borrowed.
b.
Ms. Smith's repayment will give the bank less purchasing power than it originally loaned her.
c.
Ms. Smith's repayment will give the bank greater purchasing power than it originally loaned her.
d.
Ms. Smith's repayment will give the bank the same purchasing power that it originally loaned her.
 



 
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