According to the table shown, if Bob is earning $30,000 in the United States and Bill is earning $40,000 in Mexico, what can be said about their standards of living?

Country: Price-level adjustment:
Australia -0.5
china .25
mexico .34
USA 0

According to the table shown, if Bob is earning $30,000 in the United States and Bill is earning $40,000 in Mexico, what can be said about their standards of living? 

A. Bill is earning more in real terms than Bob.

B. Bob is earning more in real terms than Bill.

C. Bob and Bill are earning the same amount in real terms.

D. Bob and Bill are earning the same amount in nominal terms.

Answer: A

According to the information in the table shown, if someone were earning $50,000 in Australia, approximately what would she need to earn in the United States to enjoy the same standard of living?

Country: Price-level adjustment:
Australia -0.5
china .25
mexico .34
USA 0

According to the information in the table shown, if someone were earning $50,000 in Australia, approximately what would she need to earn in the United States to enjoy the same standard of living? 

A. $75,000

B. $33,333

C. $25,000

D. $37,500

Answer: B

According to the information in the table shown, if someone were earning $30,000 in the United States, approximately what would they have to earn in China to have the same standard of living?

Country: Price-level adjustment:
Australia -0.5
china .25
mexico .34
USA 0

According to the information in the table shown, if someone were earning $30,000 in the United States, approximately what would they have to earn in China to have the same standard of living? 

A. $40,000

B. $7,500

C. $22,500

D. $15,000




Answer: C

According to the information in the table shown, if someone were earning $20,000 in Mexico, approximately what would he need to earn in the United States to enjoy the same amount of goods and services?

Country: Price-level adjustment:
Australia -0.5
china .25
mexico .34
USA 0

According to the information in the table shown, if someone were earning $20,000 in Mexico, approximately what would he need to earn in the United States to enjoy the same amount of goods and services? 

A. $30,303

B. $35,000

C. $20,030

D. $15,000


Answer: A

The information in the table shown:

Country: Price-level adjustment:
Australia -0.5
china .25
mexico .34
USA 0

The information in the table shown: 

A. allows us to compare the standard of living in one country to another.

B. has been indexed to the United States.

C. shows that the typical good in Australia is more expensive than it is in the United States.

D. All of these statements are true.

Answer: D

According to the information in the table shown, if someone were to make $35,000, she would be able to buy more goods and services if she lived in:

This table shows the price-level adjustment as compared to the United States.

Country: Price-level adjustment:
Australia -0.5
china .25
mexico .34
USA 0

According to the information in the table shown, if someone were to make $35,000, she would be able to buy more goods and services if she lived in: 

A. Australia.

B. the United States.

C. Mexico.

D. China.

Answer: C

According to the information given in the table shown, if someone makes $40,000 in the U.S., what would his salary need to be in Mexico to maintain the same standard of living?

This table shows the price-level adjustment as compared to the United States.

Country: Price-level adjustment:
Australia -0.5
china .25
mexico .34
USA 0

According to the information given in the table shown, if someone makes $40,000 in the U.S., what would his salary need to be in Mexico to maintain the same standard of living? 

A. $60,606

B. $26,400

C. $40,000

D. $13,600

Answer: B

Making international comparisons of purchasing power:

Making international comparisons of purchasing power: 

A. is not straightforward.

B. is complicated by trying to define a "typical" consumer.

C. is hard especially when attempting to figure out the true purchasing power of the poor.

D. All of these statements are true.

Answer: D

PPP-adjustment:

PPP-adjustment: 

A. gives us a more realistic sense of differences in living standards around the world.

B. lets us see that poorer countries are not quite so poor as suggested by their nominal GDP per capita.

C. gives us a realistic sense of how the living standards of the world's poorest citizens translate into dollar terms.

D. All of these statements are true.

Answer: D

PPP-adjustment involves:

PPP-adjustment involves: 

A. recalculating economic statistics to account for differences in price levels across countries.

B. a method very similar to adjusting to cost-of-living increases using a price index like the CPI.

C. recalculating a variable like GDP per capita so we can compare someone's standard of living across countries.

D. All of these statements are true.

Answer: D

The ICP index:

The ICP index: 

A. uses a broad market basket that tries to represent the full cost of living across countries.

B. is an imperfect measure because of cultural differences.

C. is an imperfect measure because of typical weather and geographical differences.

D. All of these statements are true.

Answer: D

The index used for international price comparisons is the:

The index used for international price comparisons is the: 

A. World Bank's International Comparison Program index.

B. World Bank's World Price Index.

C. United Nations' World Consumer Price Index.

D. World Trade Federation's International Price Index.

Answer: A

The Big Mac index compares:

The Big Mac index compares: 

A. the cost of a Big Mac all over the world.

B. the cost of a typical basket for consumers all over the world.

C. typical food costs, as food is the largest component of all consumption baskets.

D. typical food and energy costs across different locations.

Answer: A

The Big Mac index:

The Big Mac index: 

A. is measured by The Economist.

B. is a simple measure that indicates differing costs of living in different countries.

C. converts the price of a Big Mac worldwide to dollars, and compares it to how much they cost in the U.S.

D. All of these statements are true.

Answer: D

Comparing the cost of the same basket of goods in different locations:

Comparing the cost of the same basket of goods in different locations: 

A. can create a price index to evaluate purchasing power across different locations.

B. is based on the theory of purchasing power parity.

C. can be used for international price comparisons.

D. All of these statements are true.

Answer: D

An example of a nontradable good is:

An example of a nontradable good is: 

A. fire-protection services.

B. a Domino's pizza.

C. a double-decker bus tour of London.

D. All of these would be considered a nontradable good.

Answer: D

An example of a nontradable good is:

An example of a nontradable good is: 

A. a lead-painted toy from China.

B. a stack of firewood from Montreal, Canada.

C. a dish of handmade pasta in Lucca, Italy.

D. All of these would be considered a nontradable good.

Answer: C

An example of a nontradable good is:

An example of a nontradable good is: 

A. a bottle of wine from a remote valley in France.

B. a rare gemstone found in South Africa.

C. a haircut by a renowned Italian hairstylist in Florence.

D. All of these would be considered a nontradable good.

Answer: C

Nontradables are cited as a reason why purchasing power parity doesn't hold because:

Nontradables are cited as a reason why purchasing power parity doesn't hold because: 

A. goods that you can't transport cannot be sold for a profit elsewhere, even if the price differs in different locations.

B. there is no economic opportunity to profit if the goods cannot be sold in another market for another price.

C. location-specific goods are impossible to calculate a price elsewhere for.

D. All of these statements are true.

Answer: D

Trade restrictions can prevent purchasing power parity from holding because:

Trade restrictions can prevent purchasing power parity from holding because: 

A. the time and energy of importation paperwork can add to the cost of the good sold.

B. tariffs can add to the cost of the good sold.

C. they can add costs to the selling price because they add to the seller's cost.

D. All of these statements are true.

Answer: D

Transactions costs prevent purchasing power parity from holding because:

Transactions costs prevent purchasing power parity from holding because: 

A. they make creating exchanges too costly in some places.

B. they include the expense of transporting the goods to be sold in another country.

C. the price of a good sold in another country must include the cost of getting it there, which can be high and cause a large price differential.

D. All of these statements are true.

Answer: D

Nontradables:

Nontradables: 

A. are goods or services that can't be taken from place to place very easily or at all.

B. are goods or services that are cultural specific and not typically traded for that reason.

C. are goods or services that are not allowed across a country's borders.

D. are goods or services that are not allowed to leave a country.

Answer: A

Trade restrictions:

Trade restrictions: 

A. increase the cost or difficulty of making exchanges across national borders.

B. discourage people from fully taking advantage of lower prices in other countries.

C. can explain why purchasing power parity doesn't typically hold.

D. All of these statements are true.

Answer: B

Transactions costs are:

Transactions costs are: 

A. the time and energy involved with creating an exchange.

B. often cited as a reason why purchasing power parity doesn't hold.

C. usually higher when transactions take place internationally.

D. All of these statements are true.

Answer: D

The idea of purchasing power parity:

The idea of purchasing power parity: 

A. always holds.

B. rarely holds.

C. explains why standards of living have changed over time.

D. explains how standards of living have changed over time.

Answer: B

Which of the following reasons can explain why purchasing power parity doesn't hold?

Which of the following reasons can explain why purchasing power parity doesn't hold? 

A. Trade restrictions

B. Subsidies

C. Political pressures

D. Purchasing power parity always holds.

Answer: B

Which of the following reasons can explain why purchasing power parity doesn't hold?

Which of the following reasons can explain why purchasing power parity doesn't hold? 

A. Transactions costs

B. Nontradables

C. Trade restrictions

D. All of these are reasons why purchasing power parity doesn't hold.

Answer: D

Which of the following reasons can explain why purchasing power parity doesn't hold?

Which of the following reasons can explain why purchasing power parity doesn't hold? 

A. Transactions costs

B. Political pressures

C. Fixed prices

D. All of these are reasons why purchasing power parity doesn't hold.

Answer: A

Purchasing power parity:

Purchasing power parity: 

A. is the theory that purchasing power in different countries should be the same when stated in a common currency.

B. allows us to compare the cost of living across different locations.

C. almost never holds in reality.

D. All of these statements are true.

Answer: D

PPP is the acronym for:

PPP is the acronym for: 

A. producer purchasing power.

B. purchasing power parity.

C. producer power parity.

D. purchasing price power.



Answer: B

Just as indexing allows us to compare the cost of living across different periods of time, the ____________ is used to allow us to compare the cost of living across different locations.

Just as indexing allows us to compare the cost of living across different periods of time, the ____________ is used to allow us to compare the cost of living across different locations. 

A. consumer purchasing index

B. purchasing power index

C. producer purchasing index

D. retail power parity

Answer: B

Cost-of-living adjustments are:

Cost-of-living adjustments are: 

A. indexed payments.

B. not common in the U.S.

C. used to automatically keep the real value of salaries or other payments constant, without having to renegotiate contracts or pass new laws.

D. All of these statements are true.

Answer: D

COLA stands for:

COLA stands for: 

A. cost-of-living adjustment.

B. cost-of-living aggregate.

C. capital operations leasing adjustment.

D. capital operations leasing agreement.

Answer: A

When something is indexed:

When something is indexed: 

A. its value is automatically adjusted in proportion to the cost of living.

B. it is expressed as nominal value multiplied by price index.

C. its real value is converted into nominal terms for comparison.

D. its relative rank in consumption items is compensated for relative to its cost.

Answer: A

Indexing Social Security payments:

Indexing Social Security payments: 

A. no longer requires a concerted effort on the part of Congress to maintain their real value.

B. still requires a concerted effort on the part of Congress to vote the amount of increase.

C. no longer requires a concerted effort on the part of Congress to maintain their nominal value.

D. still requires a concerted effort on the part of Congress to convert them to their nominal amounts.

Answer: A

Indexing Social Security payments is done using:

Indexing Social Security payments is done using: 

A. the CPI.

B. the PPI.

C. the GDP deflator.

D. the RPI.

Answer: A

Now that Social Security payments are indexed:

Now that Social Security payments are indexed: 

A. the nominal value is adjusted to maintain a constant real value.

B. the real value is adjusted to maintain a constant nominal value.

C. the payments are adjusted so retirees can buy more with their payments over time.

D. the payments are not adjusted enough, so retirees can buy less with their payments over time.

Answer: A

Social Security payments:

Social Security payments: 

A. began to be indexed to inflation in 1975.

B. are now indexed using the CPI.

C. are adjusted using COLAs.

D. All of these statements are true.

Answer: D

Until Congress began to periodically raise benefit levels to adjust for inflation, the first recipients of Social Security checks:

Until Congress began to periodically raise benefit levels to adjust for inflation, the first recipients of Social Security checks: 

A. lost value over time, because the payments were not adjusted for inflation.

B. received a fixed amount that caused their real income to decline.

C. grew poorer over time, because the payments were nominal amounts.

D. All of these statements are true.

Answer: A

When Social Security checks were first issued:

When Social Security checks were first issued: 

A. the nominal amount stayed the same for the life of the payments.

B. the nominal amount was regularly increased by 5 percent every 3 months.

C. the nominal amount was regularly increased by 10 percent every 3 years.

D. the nominal amount was regularly increased by 3 percent every 5 years.

Answer: A

Social Security payments:

Social Security payments: 

A. were not originally adjusted for inflation, causing the real value to retirees to increase over time.

B. were not originally adjusted for inflation, causing the real value to retirees to decrease over time.

C. were originally adjusted for inflation, causing the real value to retirees to increase over time.

D. were originally adjusted for inflation, causing the real value to retirees to decrease over time.

Answer: B

Social Security payments:

Social Security payments: 

A. were not indexed to adjust for inflation until 1940.

B. were not indexed to adjust for inflation until 1968.

C. were not indexed to adjust for inflation until 1975.

D. were not indexed to adjust for inflation until 1980.

Answer: C

Social Security checks began to be issued in:

Social Security checks began to be issued in: 

A. 1920.

B. 1930.

C. 1940.

D. 1950.

Answer: C

Ida May Fuller was the first person to:

Ida May Fuller was the first person to: 

A. receive a Social Security check.

B. have her Social Security check adjusted for inflation.

C. receive Social Security payments for over 20 years.

D. petition Congress for indexing Social Security payments.

Answer: A

Inflation:

Inflation: 

A. doesn't necessarily harm purchasing power.

B. always decreases purchasing power.

C. always increases purchasing power.

D. should try to be avoided at all costs.

Answer: A

Inflation:

Inflation: 

A. hurts everyone in the economy whenever it occurs.

B. hurts everyone in the economy the same.

C. always decreases purchasing power.

D. has very real costs associated with it.

Answer: D

One fundamental idea in macroeconomics about inflation is:

One fundamental idea in macroeconomics about inflation is: 

A. if all prices rise, then inflation doesn't really affect anyone's purchasing power.

B. when all prices rise, inflation occurs and everyone is worse off.

C. keeping prices constant is the only way to ensure increasing purchasing power over time.

D. if all prices decline, the purchasing power of everyone declines.

Answer: A

In 1976, the cost of a movie was $4. In 2012, it's $9. If the CPI for 1976 is 56, and 228 for 2012, to find the real 2012 value of a 1976 movie, we would multiply its nominal value in 1976 by the ratio of:

In 1976, the cost of a movie was $4. In 2012, it's $9. If the CPI for 1976 is 56, and 228 for 2012, to find the real 2012 value of a 1976 movie, we would multiply its nominal value in 1976 by the ratio of: 

A. (56/228).

B. (228/56).

C. (9/5).

D. (5/9).

Answer: B

In 1976, the cost of a movie was $4. In 2012, it's $9. If the CPI for 1976 is 56, and 228 for 2012, then we could say the cost of a 1976 movie in 2012 would be:

In 1976, the cost of a movie was $4. In 2012, it's $9. If the CPI for 1976 is 56, and 228 for 2012, then we could say the cost of a 1976 movie in 2012 would be: 

A. $16.29, so the cost of movies has not increased as much as general inflation.

B. $16.29, so the cost of movies is relatively more in 2012 than it was in 1976.

C. $2.21, so the cost of movies has not increased as much as general inflation.

D. $2.21, so the cost of movies is relatively more in 2012 than it was in 1976.

Answer: A

The real value of any variable is:

The real value of any variable is: 

A. its nominal value adjusted for inflation.

B. its nominal value holding the base constant.

C. its nominal value holding the quantity constant.

D. its nominal value hold the basket constant.

Answer: A

Your father tells you he earned a salary of $45,000 a year in 1980. This salary figure is:

Year: Salary: CPI:
1969 $20,520 36.7
1979 $43,256 72.6
1989 $85,529 124
1999 $135,250 166.6
2009 $170,844 214.5

Your father tells you he earned a salary of $45,000 a year in 1980. This salary figure is: 

A. the nominal value of his salary in 1980.

B. the real value of his salary in 1980.

C. the value of his salary adjusted to 2009 dollars.

D. the value of his salary adjusted for inflation.



Answer: A

If the 1999 salary in 2009 dollars is $174,136, what can we say about it compared to the 2009 income given in the table shown?

Year: Salary: CPI:
1969 $20,520 36.7
1979 $43,256 72.6
1989 $85,529 124
1999 $135,250 166.6
2009 $170,844 214.5

If the 1999 salary in 2009 dollars is $174,136, what can we say about it compared to the 2009 income given in the table shown? 

A. Although the nominal salary has increased, the amount of purchasing power has decreased from 1999 to 2009.

B. The increase in salary from 1999 to 2009 was less than inflation during that period.

C. The 1999 salary could buy more goods and services in 2009 than the 2009 salary could buy.

D. All of these statements are true.

Answer: D

Using the information in the table shown, what is the 1999 salary in 2009 dollars?

Year: Salary: CPI:
1969 $20,520 36.7
1979 $43,256 72.6
1989 $85,529 124
1999 $135,250 166.6
2009 $170,844 214.5

Using the information in the table shown, what is the 1999 salary in 2009 dollars? 

A. $174,136

B. $132,692

C. $105,292

D. $170,844




Answer: A

If the 1989 salary in 2009 dollars is $147,951, how do we interpret this?

Year: Salary: CPI:
1969 $20,520 36.7
1979 $43,256 72.6
1989 $85,529 124
1999 $135,250 166.6
2009 $170,844 214.5

If the 1989 salary in 2009 dollars is $147,951, how do we interpret this? 

A. The salary earned in 1989 could have purchased the same amount of goods as $147,951 could buy in 2009.

B. It would take $147,951 in 2009 to buy the same amount of goods that was purchased in 1989 with $85,529.

C. Someone earning $85,529 in 1989 would be as well off if he were earning $147,951 in 2009.

D. All of these are correct interpretations.

Answer: D

How can we use the information from the table shown to compare the real value of the 1979 salary to that of the one earned in 2009?

Year: Salary: CPI:
1969 $20,520 36.7
1979 $43,256 72.6
1989 $85,529 124
1999 $135,250 166.6
2009 $170,844 214.5

How can we use the information from the table shown to compare the real value of the 1979 salary to that of the one earned in 2009? 

A. You can see that the salary has increased from $43,265 to $170,844.

B. You need to put the 2009 salary into real 2009 terms to compare it to 1979.

C. You need to put both salaries into real dollars in the same year for comparison.

D. There is no real way to compare the two.

Answer: C

Using the information in the table shown, what is the 2009 value of the salary listed in 1979?

Year: Salary: CPI:
1969 $20,520 36.7
1979 $43,256 72.6
1989 $85,529 124
1999 $135,250 166.6
2009 $170,844 214.5

Using the information in the table shown, what is the 2009 value of the salary listed in 1979? 

A. $127,828

B. $14,643

C. $57,824

D. $504,766

Answer: A

Suppose we want to know how much money your grandparents would have to earn now to have purchasing power equivalent to their income in 1969. We could:

Suppose we want to know how much money your grandparents would have to earn now to have purchasing power equivalent to their income in 1969. We could: 

A. translate their nominal income in 1969 into constant, real dollars of today.

B. translate their nominal income today into 1969 dollars.

C. take a ratio of their income today with their income from 1969.

D. None of these statements is true.

Answer: A

When someone tells you they made $17,000 in 1970:

When someone tells you they made $17,000 in 1970: 

A. it is difficult to tell from that number if the person was well off or not, because prices have changed so much since then.

B. the income should be adjusted into current dollars to clearly understand what that salary is "worth" in terms of purchasing power.

C. it is a nominal figure that is hard to understand. A real figure would be more helpful.

D. All of these statements are true.

Answer: D

We translate nominal income in any past year into constant, real dollars to:

We translate nominal income in any past year into constant, real dollars to: 

A. allow us to compare changes in purchasing power over time.

B. see what an income we were earning in the past would be equivalent to today.

C. understand what a salary in the past would equal in current dollars to determine how much more we have actually gained in purchasing power.

D. All of these statements are true.

Answer: D

In practice, the three measurements of inflation, the CPI, PPI, and GDP deflator:

In practice, the three measurements of inflation, the CPI, PPI, and GDP deflator: 

A. all closely track each other.

B. are all positively correlated.

C. all measure inflation, but focus on different parts of the economy.

D. All of these statements are true.

Answer: D

The GDP deflator differs from the CPI in its measurement of inflation in that:

The GDP deflator differs from the CPI in its measurement of inflation in that: 

A. it measures the price changes of all goods, not just those in a typical consumer's basket.

B. it uses the total quantities that are produced, not the ratio of what a typical consumer might consume.

C. it does not include imports, which may have a real effect on the typical consumer's cost of living.

D. All of these statements are true.

Answer: D

The GDP deflator:

The GDP deflator: 

A. measures price changes for everything produced in the country.

B. doesn't include goods produced abroad.

C. is computed using the quantities that are produced in the economy each year.

D. All of these statements are true.

Answer: D

We calculate many different kinds of price indexes:

We calculate many different kinds of price indexes: 

A. in order to capture a complete picture of how price changes are affecting the economy.

B. to see how the prices of different groups of goods are changing.

C. to measure how different groups of people in the economy are being affected by changing prices.

D. All of these statements are true.

Answer: D

Inflation is measured by examining the percent increase in the ________ from one year to the next.

Inflation is measured by examining the percent increase in the ________ from one year to the next. 

A. CPI

B. PPI

C. GDP deflator

D. Inflation is measured as the percentage increase of any index, regardless of the index used.

Answer: D

Regardless of the index we use:

Regardless of the index we use: 

A. inflation is measured as a percent increase in the index from one year to the next.

B. we get the same measurements for inflation, so each is equally useful.

C. the measurement of inflation is the same, so we use the one easiest to calculate.

D. All of these statements are true.

Answer: A

The producer price index is considered a good predictor of future consumer prices because:

The producer price index is considered a good predictor of future consumer prices because: 

A. increases in input prices eventually make it to consumers when they buy the final product.

B. increases in input prices are accounted for in PPI, and therefore this automatically adjusts the CPI.

C. increases in input prices are observed first in the PPI, adjusting the CPI downward.

D. None of these statements is true.

Answer: A

Because increases in input prices eventually make it to consumers when they buy the final product, the PPI:

Because increases in input prices eventually make it to consumers when they buy the final product, the PPI: 

A. is considered a good predictor of future consumer prices.

B. is a lag variable for inflation.

C. accounts for inflation before it reaches consumers, adjusting the CPI downward.

D. accounts for inflation before it reaches consumers, adjusting the CPI upward.


Answer: A

A good that is most likely to be in the producer price index is:

A good that is most likely to be in the producer price index is: 

A. gasoline.

B. apples.

C. books.

D. All of these are in the PPI.

Answer: A

A good that is most likely to be in the producer price index is:

A good that is most likely to be in the producer price index is: 

A. light trucks.

B. gasoline.

C. passenger cars.

D. All of these are in the PPI.

Answer: D

A good that is most likely to be in the producer price index is:

A good that is most likely to be in the producer price index is: 

A. industrial machinery.

B. light trucks.

C. soft lumber.

D. All of these are in the PPI.

Answer: D

The price index that measures the prices of goods and services purchased by firms is called the:

The price index that measures the prices of goods and services purchased by firms is called the: 

A. PPI.

B. CPI.

C. RPI.

D. PRI.

Answer: A

The price index that measures the prices of goods and services purchased by firms is called the:

The price index that measures the prices of goods and services purchased by firms is called the: 

A. producer price index.

B. purchasing power index.

C. consumer price index.

D. retail sales index.

Answer: A

While the CPI focuses on changes to prices for consumers, the PPI:

While the CPI focuses on changes to prices for consumers, the PPI: 

A. measures the prices of goods and services purchased by firms.

B. stands for the producer price index.

C. looks specifically at the prices changes that affect the typical producer.

D. All of these statements are true.

Answer: D

Any basket of goods that is missing food and energy items:

Any basket of goods that is missing food and energy items: 

A. is missing a large portion of consumption.

B. is missing a small portion of a typical consumer's basket.

C. is a useless calculation.

D. is called the retail sales index.

Answer: A

Core inflation is measured because:

Core inflation is measured because: 

A. food and energy costs fluctuate frequently and can distort actual changes in the cost of living.

B. the prices of retail consumption items fluctuate frequently and can distort actual changes in the cost of living.

C. the prices of nondurable goods fluctuate more frequently than the prices of durable goods; therefore, removing them from the basket prevents potential distortion.

D. the prices of durable goods fluctuate more frequently than the prices of nondurable goods; therefore, removing them from the basket prevents potential distortion.

Answer: A

Core inflation:

Core inflation: 

A. measures the changes in prices for the entire market basket of the average urban consumer.

B. is inflation measured using the producer price index.

C. measures price changes for the market basket of the average urban consumer with food and energy costs taken out.

D. is inflation measured using the retail price index.



Answer: C

Headline inflation:

Headline inflation: 

A. measures the changes in prices for the entire market basket of the average urban consumer.

B. is inflation measured using the producer price index.

C. measures price changes with food and energy costs taken out of the basket.

D. is inflation measured using the retail price index.

Answer: A

Using the information in the table shown, what can be said about the rate of inflation?

Year: CPI:
2005 94
2006 99
2007 100
2008 104
2009 117

Using the information in the table shown, what can be said about the rate of inflation? 

A. Deflation occurred before 2007, then inflation occurred.

B. Deflation occurred until 2009, then inflation occurred.

C. Inflation occurred every year from 2005 to 2009.

D. None of these statements is accurate.

Answer: C

Using the information in the table shown, the rate of inflation from 2008 to 2009 was:

Year: CPI:
2005 94
2006 99
2007 100
2008 104
2009 117

Using the information in the table shown, the rate of inflation from 2008 to 2009 was: 

A. 12.5 percent.

B. 11.1 percent.

C. 13 percent.

D. 17 percent.




Answer: A

Using the information in the table shown, the rate of inflation from 2005 to 2006 was:

Year: CPI:
2005 94
2006 99
2007 100
2008 104
2009 117

Using the information in the table shown, the rate of inflation from 2005 to 2006 was: 

A. 5.32 percent.

B. 5.05 percent.

C. 5.00 percent.

D. 6.00 percent.

Answer: A

The inflation rate is:

The inflation rate is: 

A. the percentage change in the overall price level.

B. one of the central concepts in macroeconomics.

C. a measure of the rate of increase in the cost of living.

D. All of these statements are true.

Answer: D

When the CPI increases from one year to the next:

When the CPI increases from one year to the next: 

A. the cost of living has increased.

B. inflation has occurred.

C. people need to spend more money to buy the same amount of goods as the previous year.

D. All of these statements are true.

Answer: D

When the CPI increases from one year to the next:

When the CPI increases from one year to the next: 

A. inflation has occurred.

B. deflation has occurred.

C. there has not been a change in the overall price level.

D. the impact to the general standard of living is hard to measure.

Answer: A

In an attempt to separate the quality changes from price changes of a product over time, the BLS does a:

In an attempt to separate the quality changes from price changes of a product over time, the BLS does a: 

A. hedonic quality adjustment.

B. heterogenic quality adjustment.

C. qualitative price change.

D. qualitative market adjustment.

Answer: A

Product innovation:

Product innovation: 

A. presents a problem for those calculating the CPI because they use a fixed basket of goods.

B. causes the basket of goods to inaccurately reflect the popularization of these goods.

C. can cause the CPI to be underestimated.

D. All of these statements are true.

Answer: D

As new goods and services become available:

As new goods and services become available: 

A. the basket of goods used to calculate the CPI immediately changes to reflect them.

B. the basket of goods used to calculate the CPI doesn't change until 75 percent of urban consumers use it.

C. the basket of goods used to calculate the CPI never changes to reflect them.

D. None of these statements is true.

Answer: D

The substitution by consumers of one good for another because of relative price changes:

The substitution by consumers of one good for another because of relative price changes: 

A. is not captured by the CPI and causes the CPI to overestimate the cost-of-living changes.

B. is captured by the CPI and causes the CPI to overestimate the cost-of-living changes.

C. is not captured by the CPI and causes the CPI to underestimate the cost-of-living changes.

D. is captured by the CPI and causes the CPI to underestimate the cost-of-living changes.

Answer: A

The substitution of one good for another by consumers:

The substitution of one good for another by consumers: 

A. due to price changes is captured by the CPI.

B. due to changes in tastes/preferences is captured by the CPI.

C. The substitution of one good for another for whatever reason is captured by the CPI.

D. The substitution of one good for another for whatever reason is not captured by the CPI.

Answer: D

One problem with keeping the CPI basket fixed is:

One problem with keeping the CPI basket fixed is: 

A. it doesn't accurately isolate price changes from behavior changes.

B. it doesn't allow for changes in people's preferences over time.

C. it can't properly predict when prices will change.

D. None of these is a problem related to keeping the CPI basket fixed.

Answer: B

The CPI attempts to:

The CPI attempts to: 

A. balance out the consumption of different types of people in different life stages.

B. balance out the consumption of different types of people in different life situations.

C. capture an average across a very large group of U.S. consumers.

D. All of these statements are true.

Answer: D

The CPI basket of goods represents those goods and services purchased by urban consumers because:

The CPI basket of goods represents those goods and services purchased by urban consumers because: 

A. it represents 87 percent of our population.

B. it represents over 90 percent of our population.

C. it represents 78 percent of our population.

D. it represents 60 percent of our population.

Answer: A

The CPI is based on:

The CPI is based on: 

A. an average of the goods and services purchased by "urban consumers."

B. an average of the goods and services purchased by "rural consumers."

C. an average of the two baskets of goods and services purchased both by "urban" and by "rural" consumers.

D. an aggregated average meant to reflect the statistical average consumption.

Answer: A

The consumers that the CPI is based on does not include:

The consumers that the CPI is based on does not include: 

A. retired persons.

B. persons living in rural areas.

C. unemployed persons.

D. The CPI does not include any of these.

Answer: B

The consumers that the CPI is based on includes:

The consumers that the CPI is based on includes: 

A. institutionalized persons.

B. incarcerated persons.

C. persons in the military.

D. The CPI does not include any of these.

Answer: D

The consumers that the CPI is based on does not include:

The consumers that the CPI is based on does not include: 

A. the unemployed.

B. the retired.

C. persons in prison.

D. The CPI does not include any of these.

Answer: C

The consumers that the CPI is based on includes:

The consumers that the CPI is based on includes: 

A. bank tellers.

B. greeters at Walmart.

C. retired persons.

D. All of these are included.

Answer: D

The consumers that the CPI is based on includes:

The consumers that the CPI is based on includes: 

A. "urban consumers."

B. professors.

C. unemployed persons.

D. All of these are included.

Answer: D

The "urban consumers" that the CPI is based on includes:

The "urban consumers" that the CPI is based on includes: 

A. anyone living in a city of 2,500 or more.

B. anyone living in a city of 5,000 or more.

C. anyone living in a city of 10,000 or more.

D. anyone living in a city of 15,000 or more.

Answer: A

Suppose the base year of the CPI is 2010, and the CPI calculated for 2012 was 102. What is the correct interpretation of this number?

Suppose the base year of the CPI is 2010, and the CPI calculated for 2012 was 102. What is the correct interpretation of this number? 

A. Average prices in the economy have increased by 102 percent since 2010.

B. Average prices in the economy have increased by 4 percent since 2010.

C. The cost of living for a typical consumer is 2 percent higher than it was in 2010.

D. The average goods of consumers has risen an average of 2 percent from 2010 to 2012.

Answer: C

The consumer price index:

The consumer price index: 

A. measures the increase in the cost of the market basket relative to the cost in a given base year.

B. is always 100 in the base year.

C. helps us understand how the cost of living today compares with the cost of living at some time in the past.

D. All of these statements are true.

Answer: D

The consumer price index is calculated by:

The consumer price index is calculated by: 

A. the Bureau of Labor Statistics.

B. the Congressional Budget Office.

C. the National Bureau of Economic Research.

D. the Social Security Office.

Answer: A

The most commonly used price index to track changes in prices for the typical household in the U.S. is:

The most commonly used price index to track changes in prices for the typical household in the U.S. is: 

A. consumer price index.

B. basket price index.

C. retail price index.

D. producer price index.

Answer: A

A price index:

A price index: 

A. measures how much the cost of a market basket has risen or fallen relative to the cost in a base time period or location.

B. summarizes the changes in the cost of living.

C. allows us to see clearly the changes in the cost of a market basket over time or across different locations.

D. All of these statements are true.

Answer: D

The market basket approach:

The market basket approach: 

A. gives us a single number that represents how changing prices affect the typical consumer.

B. gives us a list of what the typical consumer buys and the average price change of those goods.

C. tells us how the prices of all goods and services in an economy change over time.

D. All of these statements are true.

Answer: A

The market basket approach:

The market basket approach: 

A. measures changes in the cost of your shopping basket, assuming that you buy the same items in the same quantities.

B. gives us a single number to measure how much your total costs rise over time.

C. makes a lot more sense than simply averaging the increase in the price of each grocery item.

D. All of these statements are true.

Answer: D

By using the market basket approach:

By using the market basket approach: 

A. it allows us to see how your cost of living is affected by the changing prices of different goods relative to how much of each good you buy.

B. we get a more accurate picture of the changing cost of living than by simply averaging the changing prices of goods listed in the market basket.

C. we get a clearer picture of the changing cost of living than by averaging the changing prices of all goods and services produced.

D. All of these statements are true.

Answer: D

Which of the following goods is least likely to be in a market basket?

Which of the following goods is least likely to be in a market basket? 

A. Helicopter

B. Gasoline

C. Barbie dolls

D. Breakfast cereal

Answer: A

Which of the following goods is least likely to be in a market basket?

Which of the following goods is least likely to be in a market basket? 

A. Shuttle service

B. Airfare

C. Streetlamps

D. Coffee beans

Answer: C

Which of the following goods is least likely to be in a market basket?

Which of the following goods is least likely to be in a market basket? 

A. A missile

B. A gallon of milk

C. A pair of khaki pants

D. A tank of heating oil

Answer: A

When the market basket is tracked over time:

When the market basket is tracked over time: 

A. the goods within the basket remain the same, so only changing prices are captured.

B. the goods within the basket reflect the typical consumer each year, so it captures how consumers are affected each year.

C. the goods within the basket reflect the typical consumer each year, but prices are held constant, so it captures if we are consuming more or less as an economy.

D. None of these statements is true.

Answer: A

The reason economists create a market basket is:

The reason economists create a market basket is: 

A. to track its changing prices to reflect changes in the cost of living.

B. to see how the cost of buying the goods and services on the list changes over time.

C. to know how typical consumers are being affected by changing prices.

D. All of these statements are true.

Answer: D

A market basket:

A market basket: 

A. is a tool devised to track how changing prices affect consumers.

B. includes all the goods and services produced in an economy.

C. includes all the goods and services consumed in an economy, including imports.

D. includes all the goods and services consumed in an economy, including net exports.

Answer: A

A market basket:

A market basket: 

A. looks like a really long shopping list.

B. includes specific goods and services in fixed quantities that roughly correspond to a typical consumer's spending.

C. includes housing, food, clothing, and transportation.

D. All of these statements are true.

Answer: D

A dollar's value can change:

A dollar's value can change: 

A. over time.

B. across different locations.

C. Both of these statements are true.

D. Neither of these statements is true.

Answer: C

When we say the cost of living has gone down, we mean that, looking broadly over a range of goods and services:

When we say the cost of living has gone down, we mean that, looking broadly over a range of goods and services: 

A. a dollar buys less today than it used to buy.

B. a dollar buys more today than it used to buy.

C. a dollar buys the same today as it used to buy.

D. our income has increased to match the cost of those goods.

Answer: B

When we say the cost of living has gone up, we mean that, looking broadly over a range of goods and services:

When we say the cost of living has gone up, we mean that, looking broadly over a range of goods and services: 

A. a dollar buys less today than it used to buy.

B. a dollar buys more today than it used to buy.

C. a dollar buys the same today as it used to buy.

D. our income has increased to match the cost of those goods.

Answer: A

A dollar:

A dollar: 

A. changes in value over time.

B. can reflect the cost of living in terms of the goods it can purchase.

C. has no worth itself, but represents goods we can buy with it.

D. All of these statements are true.

Answer: D