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Multiple Choice
1. Babe Ruth, the famous baseball player, earned $80,000 in 1931. Today, the best baseball
players can earn more than 400 times as much as Babe Ruth earned in 1931. However, prices
have also risen since 1931. We can conclude that
a. the best baseball players today are about 400 times better off than Babe Ruth was in
1931.
b. because prices have also risen, the standard of living of baseball stars hasn't changed
since 1931.
c. one cannot make judgments about changes in the standard of living based on changes in
prices and changes in incomes.
d. one cannot determine whether baseball stars today enjoy a higher standard of living than
Babe Ruth did in 1931 without additional information regarding increases in prices since
1931.
2. Which of the following is not correct?
a. The consumer price index gives economists a way of turning dollar figures into
meaningful measures of purchasing power.
b. The consumer price index is used to monitor changes in the cost of living over time.
c. The consumer price index is used by economists to measure the inflation rate.
d. The consumer price index is used to measure the quantity of goods and services that the
economy is producing.
3. When the consumer price index falls, the typical family
a. has to spend more dollars to maintain the same standard of living.
b. can spend fewer dollars to maintain the same standard of living.
c. finds that its standard of living is not affected.
d. can save less because they do not need to offset the effects of rising prices.
4. The inflation rate you are likely to hear on the nightly news is calculated from
a. the GDP deflator.
b. the CPI.
c. the Dow Jones Industrial Average.
Kingfisher School of Business and Finance 1
Chapter 11/Public Goods and Common Resources 2
d. the unemployment rate.
5. Which of the following is correct?
a. The GDP deflator is better than the CPI at reflecting the goods and services bought by
consumers.
b. The CPI is better than the GDP deflator at reflecting the goods and services bought by
consumers.
c. The GDP deflator and the CPI are equally good at reflecting the goods and services
bought by consumers.
d. The GDP deflator is more commonly used as a gauge of inflation than the CPI is.
6. The CPI is a measure of the overall cost of the goods and services bought by
a. a typical consumer, and the CPI is computed and reported by the Department of the
Treasury.
b. typical consumers and typical business firms, and the CPI is computed and reported by
the Department of the Treasury.
c. a typical consumer, and the CPI is computed and reported by the Bureau of Labor
Statistics.
d. typical consumers and typical business firms, and the CPI is computed and reported by
the Bureau of Labor Statistics.
7. 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.
8. In the calculation of the CPI, books are given greater weight than magazines if
a. consumers buy more books than magazines.
b. the price of books is higher than the price of magazines.
c. it costs more to produce books than it costs to produce magazines.
d. books are more readily available than magazines to the typical consumer.
9. What basket of goods and services 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
10. When computing the cost of the basket of goods and services purchased by a typical
consumer, which of the following changes from year to year?
a. the quantities of the goods and services purchased
b. the prices of the goods and services
c. the goods and services making up the basket
d. All of the above are correct.
11. If 2012 is the base year, then the inflation rate for 2012 equals
a.
b.
c.
d.
12. If the consumer price index was 96 in 2012, 100 in 2013, and 102 in 2014, then the base year
must be
a. 2012.
b. 2013.
c. 2014.
d. The base year cannot be determined from the given information.
13. Suppose a basket of goods and services has been selected to calculate the CPI and 2012 has
been chosen as the base year. In 2012, the basket’s cost was $80.00? in 2013, the basket’s
cost was $84? and in 2014, the basket’s cost was $87.60. The value of the CPI was
a. 100 in 2012.
b. 105 in 2013.
c. 109.5 in 2014.
d. All of the above are correct.
14. Suppose a basket of goods and services has been selected to calculate the CPI and 2012 has
been selected as the base year. In 2012, the basket’s cost was $50? in 2014, the basket’s cost
was $51? and in 2016, the basket’s cost was $52. The value of the CPI in 2014 was
a. 98.0.
b. 102.0.
c. 104.0.
d. 151.0.
15. Suppose a basket of goods and services has been selected to calculate the CPI and 2012 has
been selected as the base year. In 2012, the basket’s cost was $50? in 2014, the basket’s cost
was $52? and in 2016, the basket’s cost was $55. The value of the CPI in 2016 was
a. 90.9.
b. 104.0.
c. 105.0.
d. 110.0.
16. The price index was 120 in 2012 and 126 in 2013. What was the inflation rate?
a. 5.0 percent
b. 6.0 percent
c. 7.2 percent
d. 105 percent
17. From 2013 to 2014, the CPI for medical care increased from 150 to 159. What was the
inflation rate for medical care?
a. 5.7 percent
b. 6.0 percent
c. 9.0 percent
d. 59.0 percent
Table 241
The table below lists annual consumer price index and inflation rates for a country over the
period 20052010. Assume the year 2005 is used as the base year.
Consumer
Year Price Index Inflation Rate
2005 100
2006 115 B
2007 125 C
2008 140 D
2009 A 10%
2010 160 E
18. Refer to Table 241. What belongs in space C?
a. 120
b. 25%
c. 8.7%
d. 12%
19. Refer to Table 241. What belongs in space D?
a. 12%
b. 154
c. 40%
d. 15%
20. Refer to Table 241. What belongs in space A?
a. 14
b. 150
c. 144
d. 154
21. Refer to Table 241. What belongs in space E?
a. 60%
b. 6%
c. 3.9%
d. 6.7%
22. The price index was 170 in the first year, 180 in the second year, and 195 in the third year.
The inflation rate was about
a. 5.6 percent between the first and second years, and 7.7 percent between the second and
third years.
b. 5.9 percent between the first and second years, and 8.3 percent between the second and
third years.
c. 10 percent between the first and second years, and 15 percent between the second and
third years.
d. 80 percent between the first and second years, and 95 percent between the second and
third years.
23. Which of the following changes in the price index produces the greatest rate of inflation: 100
to 110, 150 to 165, or 180 to 198?
a. 100 to 110
b. 150 to 165
c. 180 to 198
d. All of these changes produce the same rate of inflation.
24. In an imaginary economy, consumers buy only sandwiches and magazines. The fixed basket
consists of 20 sandwiches and 30 magazines. In 2006, a sandwich cost $4 and a magazine
cost $2. In 2007, a sandwich cost $5. The base year is 2006. If the consumer price index in
2007 was 125, then how much did a magazine cost in 2007?
a. $0.83
b. $2.25
c. $2.50
d. $3.00
25. The price index was 92 in 2014, and the inflation rate was 8.7 percent between 2013 and
2014. The price index in 2013 was
a. 100.0.
b. 100.7.
c. 83.3.
d. 84.6.
26. Suppose the price index was 105 in 2017, 126 in 2018, and the inflation rate was lower
between 2018 and 2019 than it was between 2017 and 2018. This means that
a. the price index in 2019 was lower than 126.0.
b. the price index in 2019 was lower than 147.0.
c. the price index in 2019 was lower than 151.2.
d. the inflation rate between 2018 and 2019 was lower than 1.2 percent.
27. For an imaginary economy, the consumer price index was 80 in 2014, 100 in 2015, and 140
in 2016. Which of the following statements is correct?
a. If the basket of goods that is used to calculate the CPI cost $40 in 2014, then that basket
of goods cost $60 in 2015.
b. If the basket of goods that is used to calculate the CPI cost $25 in 2015, then that basket
of goods cost $35 in 2016.
c. The overall level of prices increased by 60 percent between 2014 and 2016.
d. All of the above are correct.
Table 242
The table below pertains to Pieway, an economy in which the typical consumers basket consists
of 15 bushels of peaches and 10 bushels of pecans.
28. Refer to Table 242. The cost of the basket in 2012 was
a. $200.
b. $225.
c. $235.
d. $212.50.
29. Refer to Table 242. The cost of the basket in 2013 was
a. $200.
b. $225.
c. $235.
d. $237.5.
30. Refer to Table 242. If 2012 is the base year, then the CPI for 2012 was
a. 95.7.
b. 100.0.
c. 90.0.
d. 110.0.
31. Refer to Table 242. If 2012 is the base year, then the CPI for 2013 was
a. 95.7.
b. 100.0.
c. 104.4.
d. 110.0.
32. Refer to Table 242. If 2013 is the base year, then the CPI for 2012 was
a. 95.7.
b. 100.0.
c. 90.0.
d. 213.6.
33. Refer to Table 242. If 2013 is the base year, then the CPI for 2013 was
a. 95.7.
b. 100.0.
c. 90.0.
d. 213.6.
34. Refer to Table 242. If 2012 is the base year, then the inflation rate in 2013 was
a. 23.5 percent.
b. 1.04 percent.
c. 10 percent.
d. 4.4 percent.
35. Refer to Table 242. If 2013 is the base year, then the inflation rate in 2013 was
a. 22.5 percent.
b. 2.35 percent.
c. 10 percent.
d. 4.4 percent.
36. In the basket of goods that is used to compute the consumer price index, the three largest
categories of consumer spending are
a. housing, transportation, and recreation.
b. housing, transportation, and food & beverages.
c. housing, food & beverages, and education & communication.
d. housing, medical care, and education & communication.
37. If the cost of transportation increases by 20 percent, then, other things the same, the CPI is
likely to increase by about
a. 0.3 percent.
b. 1.7 percent.
c. 3.4 percent.
d. 10 percent.
38. Which of the following is not a widely acknowledged problem with using 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
39. When the relative price of a good decreases, consumers respond by buying
a. a larger quantity of that good and a larger quantity of substitutes for that good.
b. a larger quantity of that good and a smaller quantity of substitutes for that good.
c. a smaller quantity of that good and a larger quantity of substitutes for that good.
d. a smaller quantity of that good and a smaller quantity of substitutes for that good.
40. Suppose the price of a quart of milk rises from $1.00 to $1.20 and the price of a Tshirt rises
from $8.00 to $9.60. If the CPI rises from 150 to 195, then people likely will buy
a. more milk and more Tshirts.
b. more milk and fewer Tshirts.
c. less milk and more Tshirts.
d. less milk and fewer Tshirts.
41. To which of the problems in the construction of the CPI is the invention of pocketsized
computers most relevant?
a. substitution bias
b. introduction of new goods
c. unmeasured quality change
d. income bias
42. When the quality of a good improves while its price remains the same, the purchasing power
of the dollar
a. increases, so the CPI overstates the change in the cost of living if the quality change is
not accounted for.
b. increases, so the CPI understates the change in the cost of living if the quality change is
not accounted for.
c. decreases, so the CPI overstates the change in the cost of living if the quality change is
not accounted for.
d. decreases, so the CPI understates the change in the cost of living if the quality change is
not accounted for.
43. Michelle bought wordprocessing software in 2009 for $75. Michelles cousin, Barry, bought
an upgrade of the same software in 2010 for $75. To which problem in the construction of
the CPI is this situation most relevant?
a. substitution bias
b. unmeasured quality change
c. introduction of new goods
d. income bias
44. The CPI differs from the GDP deflator in that
a. the CPI is a price index, while the GDP deflator is an inflation index.
b. substitution bias is not a problem with the CPI, but it is a problem with the GDP deflator.
c. increases in the prices of foreign produced goods that are sold to U.S. consumers show up
in the CPI but not in the GDP deflator.
d. increases in the prices of domestically produced goods that are sold to the U.S.
government show up in the CPI but not in the GDP deflator.
45. The CPI differs from the GDP deflator in that
a. the CPI is an inflation index, while the GDP deflator is a price index.
b. substitution bias is not a problem with the CPI, but it is a problem with the GDP deflator.
c. increases in the prices of foreign produced goods that are sold to U.S. consumers show up
in the GDP deflator but not in the CPI.
d. increases in the prices of domestically produced goods that are sold to the U.S.
government show up in the GDP deflator but not in the CPI.
Table 249
The table below lists the per gallon prices of gas and milk for the months of April, May, and
June. Assume that the typical consumer buys 60 gallons of gas and 4 gallons of milk each month,
and that April is the base period.
46. Refer to Table 249. What is the consumer price index for May?
a. 60
b. 132
c. 166
d. 123
47. Refer to Table 249. What is the inflation rate for May?
a. 66.4%
b. 60.1%
Kingfisher School of Business and Finance
Chapter 11/Public Goods and Common Resources 11
c. 4.1%
d. 10%
48. Changes in the quality of a good
a. do not present a problem in the construction of the consumer price index.
b. present a problem in the construction of the consumer price index, and that problem is
sometimes referred to as substitution bias.
c. are not accounted for, as a matter of policy, by the Bureau of Labor Statistics.
d. can lead to either an increase or a decrease in the value of a dollar.
49. In which of the following cases would there be an effect on the value of the U.S. consumer
price index, but not on the value of the U.S. GDP deflator?
a. All of the truck tires that are produced by a certain company in South Korea are sold to
the U.S. military, and the price of these tires decreases.
b. All of the truck tires that are produced by a certain company in California are sold to the
U.S. military, and the price of these tires decreases.
c. Most of the bananas that are produced by a certain company in Honduras end up in U.S.
grocery stores, and the price of these bananas increases.
d. Most of the earthmoving machines that are produced by a certain company in Illinois are
exported to other countries, and the price of these machines increases.
50. Which of the following pairs of values of the consumer price index (CPI) is consistent with
an inflation rate of 10 percent for 2014?
a. CPI in 2014 = 90; CPI in 2015 = 100
b. CPI in 2014 = 102; CPI in 2015 = 112
c. CPI in 2013 = 210; CPI in 2014 = 220
d. CPI in 2013 = 210; CPI in 2014 = 231
51. Suppose you know the value of the consumer price index (CPI) in year 1 as well as the
inflation rate in year 2. Which of the following equations is valid for the CPI in year 2?
a. CPI in year 2 =
b. CPI in year 2 =
c. CPI in year 2 =
d. CPI in year 2 =
52. In 1931, President Herbert Hoover was paid a salary of $75,000. Government statistics show
a consumer price index of 15.2 for 1931 and 229.6 for 2012. President Hoovers 1931 salary
was equivalent to a 2012 salary of about
a. $4,965.
b. $1,132,895.
c. $1,057,894.
d. $16,080,001.
53. You know that a candy bar cost five cents in 1962. You also know the CPI for 1962 and the
CPI for today. Which of the following would you use to compute the price of the candy bar
in today's prices?
a. five cents × (1962 CPI / today's CPI)
b. five cents × ((today's CPI 1962 CPI)/1962 CPI)
c. five cents × (today's CPI / 1962 CPI)
d. five cents × today's CPI five cents 1962 CPI.
54. If the CPI was 104 in 1967 and is 390 today, then $10 in 1967 purchased the same amount of
goods and services as
a. $2.67 purchases today.
b. $37.50 purchases today.
c. $39.00 purchases today.
d. $104.00 purchases today.
55. In 1949, Sycamore, Illinois built a hospital for about $500,000. In 1987, the county restored
the courthouse for about $1.7 million. A price index for nonresidential construction was 24 in
1949, 108 in 1987, and 126.5 in 2000. According to these numbers, the hospital cost about
a. $2.1 million in 2000 dollars, which is less than the cost of the courthouse restoration in
2000 dollars.
b. $2.1 million in 2000 dollars, which is more than the cost of the courthouse restoration in
2000 dollars.
c. $2.6 million in 2000 dollars, which is less than the cost of the courthouse restoration in
2000 dollars.
d. $2.6 million in 2000 dollars, which is more than the cost of the courthouse restoration in
2000 dollars.
56. Henri earned a salary of $50,000 in 2001 and $70,000 in 2006. The consumer price index
was 177 in 2001 and 265.5 in 2006. Henri's 2006 salary in 2001 dollars is
a. $35,000.00.
b. $46,666.67.
c. $61,950.00
d. $105,000.00.
57. Harry spent $39,000 in 2009 and $42,000 in 2014 on goods and services. The consumer price
index was 220 for 2009 and 231 for 2014. Harrys 2014 spending in 2009 dollars is about
a. $40,000.
b. $44,100.
c. $37,838.
d. $40,091.
Scenario 243
Sue Holloway was an accountant in 1944 and earned $12,000 that year. Her son, Josh Holloway,
is an accountant today and he earned $210,000 in 2013. The price index was 17.6 in 1944 and
218.4 in 2013.
58. Refer to Scenario 243. Sue Holloways 1944 income in 2013 dollars is
a. $23,033.
b. $136,909.
c. $148,909.
d. $240,960.
59. Refer to Scenario 243. Josh Holloways 2013 income in 1944 dollars is
a. $11,528.
b. $16,923.
c. $149,009.
d. $26,059.
60. Refer to Scenario 243. In real terms, Josh Holloways income amounts to about what
percentage of Sue Holloways income?
a. 71 percent
b. 141 percent
c. 165 percent
d. 198 percent
61. Refer to Scenario 243. In real terms, Sue Holloways income amounts to about what
percentage of Josh Holloways income?
a. 11.0 percent
b. 65.2 percent
c. 70.9 percent
d. 114.7 percent
Table 2413. Olivias expenditures on clothing for three consecutive years, along with some
values for the CPI, are presented in the table below.
Year
2009 2010 2011
Expenditures on Clothing $1,200 $1,600 $1,800
Consumer Price Index X 180 200
62. Refer to Table 2413. To the nearest dollar, how much is Olivias 2010 clothing expenditure
in 2011 dollars?
a. $1,683
b. $1,778
c. $1,800
d. $3,600
63. Refer to Table 2413. Suppose Olivias 2009 clothing expenditure in 2010 dollars amounts to
$1,440. Then X, the consumer price index for 2009, has a value of
a. 120.
b. 130.
c. 140.
d. 150.
64. Suppose todays CPI is 134.85, and suppose one must spend $580 today to purchase the same
basket of goods and services that could be bought for $400 in 1989. Then the CPI in 1989
was
a. 24.27.
b. 60.68.
c. 93.00.
d. 195.53.
65. John just graduated law school and has two competing job offers. The first is in Phoenix and
pays a salary of $150,000. He has a similar job offer in Cleveland that pays $90,000. Which
pair of CPIs would make the two salaries have the same purchasing power?
a. 70 in Phoenix and 42 in Cleveland
b. 68 in Phoenix and 34 in Cleveland
c. 42 in Phoenix and 70 in Cleveland
d. 34 in Phoenix and 68 in Cleveland
66. 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
a. $0.04.
b. $0.29.
c. $0.30.
d. $0.50.
67. Which of the following statements about real and nominal interest rates is correct?
a. Real interest rates can be either positive or negative, but nominal interest rates must be
positive.
b. Real interest rates and nominal interest rates must be positive.
c. Real interest rates must be positive, but nominal interest rates can be either positive or
negative.
d. Real interest rates and nominal interest rates can be either positive or negative.
68. If the nominal interest rate is 6 percent and the rate of inflation is 10 percent, then the real
interest rate is
a. 16 percent.
b. 4 percent.
c. 4 percent.
d. 16 percent.
69. Suppose the consumer price index was 184 in 2009 and 198.17 in 2010. The nominal interest
rate during this period was 5.8 percent. What was the real interest rate during this period?
a. 0.4 percent
b. 1.2 percent
c. 1.9 percent
d. 2.6 percent
70. The CPI was 220 in 2012 and 231 in 2013. Phil borrowed money in 2012 and repaid the loan
in 2013. If the nominal interest rate on the loan was 10 percent, then the real interest rate was
a. 5 percent.
b. 1 percent.
c. 5 percent.
d. 3.2 percent.
71. Jake loaned Elwood $5,000 for one year at a nominal interest rate of 10 percent. After
Elwood repaid the loan in full, Jake complained that he could buy 4 percent fewer goods with
the money Elwood gave him than he could before he loaned Elwood the $5,000. From this,
we can conclude that the rate of inflation during the year was
a. 4 percent.
b. 4 percent.
c. 6 percent.
d. 14 percent.
72. The nominal interest rate for a consumer loan lasting from 2007 to 2008 is 8.5 percent and
the real interest rate is 4.5 percent. If the consumer price index was 200 in 2007, what would
the consumer price index value be in 2008?
a. 192
b. 208
c. 209
d. 217