Chapter 24 Measuring the Cost of Living

Multiple Choice

1013
1014 ! Chapter 24/Measuring the Cost of Living
1. Babe Ruth, the famous baseball player, earned $80,000 in 1931. Today, the best baseball players can earn more than 300
times as much as Babe Ruth earned in 1931. However, prices also have risen since 1931. We can conclude that
a. the best baseball players today are about 300 times better off than Babe Ruth was in 1931.
b. because prices have risen also, 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. When the consumer price index rises, 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 offset the effects of rising prices by saving more.
3. The consumer price index is used to
a. track changes in the level of wholesale prices in the economy.
b. monitor changes in the cost of living.
c. monitor changes in the level of real GDP.
d. track changes in the stock market.
4. 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.
5. The term inflation is used to describe a situation in which
a. the overall level of prices in the economy is increasing.
b. incomes in the economy are increasing.
c. stock-market prices are rising.
d. the economy is growing rapidly.
6. 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.
7. When the overall level of prices in the economy is increasing, we say that the economy is experiencing
a. economic growth.
b. stagflation.
c. inflation.
d. deflation.
8. The inflation rate is defined as the
a. price level.
b. change in the price level from one period to the next.
c. percentage change in the price level from the previous period.
d. price level minus the price level from the previous period.
9. 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.
10. 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.
11. Which of the following agencies calculates the CPI?
a. the National Price Board
b. the Department Of Weight and Measurements
c. the Bureau of Labor Statistics
d. the Congressional Budget Office
12. Which entity within the U.S. government is responsible for computing and reporting the consumer price index?
a. the Department of Commerce
b. the Department of Labor
 Chapter 24/Measuring the Cost of Living ! 1015
c. the General Accounting Office
d. the Council of Economic Advisers
13. The CPI is calculated
a. weekly.
b. monthly.
c. quarterly.
d. yearly.
14. The CPI is calculated
a. monthly by the Department of Commerce.
b. monthly by the Bureau of Labor Statistics.
c. quarterly by the Department of Commerce.
d. quarterly by the Bureau of Labor Statistics.
15. 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
16. In the calculation of the CPI, coffee is given greater weight than tea if
a. consumers buy more coffee than tea.
b. the price of coffee is higher than the price of tea.
c. it costs more to produce coffee than it costs to produce tea.
d. coffee is more readily available than is tea to the typical consumer.
17. 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.
18. The steps involved in calculating the consumer price index, in order, are as follows:
a. Choose a base year, fix the basket, compute the inflation rate, compute the basket's cost, and compute the index.
b. Choose a base year, find the prices, fix the basket, 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.
d. Fix the basket, find the prices, compute the inflation rate, choose a base year and compute the index.

Table 24-1
Year Peaches Pecans
2005 $11 per bushel $6 per bushel
2006 $9 per bushel $10 per bushel

19. Refer to Table 24-1. Suppose the typical consumer basket consists of 10 bushels of peaches and 15 bushels of pecans.
Using 2005 as the base year, the CPI for 2006 is
a. 100.
b. 120.
c. 200.
d. 240.
20. Refer to Table 24-1. Suppose the typical consumer basket consists of 10 bushels of peaches and 15 bushels of pecans.
Using 2005 as the base year, what was the inflation rate in 2006?
a. 20 percent
b. 16.7 percent
c. 10 percent
d. 8 percent

Table 24-2
Year Price of pork Price of corn
2005 $20 $12
2006 $25 $18
1016 ! Chapter 24/Measuring the Cost of Living
21. Refer to Table 24-2. Suppose the basket of goods in the CPI consisted of 3 units of pork and 4 units of corn. What is the
consumer price index for 2006 if the base year is 2005?
a. 73.47
b. 109.22
c. 136.11
d. 150.00
22. Refer to Table 24-2. Suppose the basket of goods in the CPI consisted of 3 units of pork and 4 units of corn. What is the
inflation rate for 2006 if the base year is 2005?
a. 21.33 percent
b. 25.00 percent
c. 28.89 percent
d. 36.11 percent
23. 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.

In the country of Shem, the CPI is calculated using a market basket consisting of 5 apples, 4 loaves of bread, 3 robes and 2
gallons of gasoline. The per-unit prices of these goods have been as follows:

Table 24-3
Year Apples Bread Robes Gasoline
2002 $1.00 $2.00 $10.00 $1.00
2003 $1.00 $1.50 $9.00 $1.50
2004 $2.00 $2.00 $11.00 $2.00
2005 $3.00 $3.00 $15.00 $2.50

24. Refer to Table 24-3. Using 2002 as the base year, what was the inflation rate between 2002 and 2003?
a. -8.89 percent
b. -7.14 percent
c. 3.75 percent
d. 11.25 percent
25. Refer to Table 24-3. Using 2002 as the base year, what was the inflation rate between 2003 and 2004?
a. 28.5 percent
b. 34.2 percent
c. 47 percent
d. It is impossible to determine without knowing the base year.
26. Refer to Table 24-3. Using 2002 as the base year, what was the inflation rate between 2004 and 2005?
a. 40.00 percent
b. 40.25 percent
c. 46.46 percent
d. 48.56 percent

Table 24-4
The table below pertains to an economy with only two goods -- books and calculators. The fixed basket consists of 5 books and
10 calculators.

Year Price of books Price of calculators

2006 $24 $8
2007 30 12
2008 32 15
 Chapter 24/Measuring the Cost of Living ! 1017
27. Refer to Table 24-4. Using 2006 as the base year, the consumer price index is
a. 100 in 2006, 135 in 2007, and 155 in 2008.
b. 100 in 2006, 270 in 2007, and 310 in 2008.
c. 200 in 2006, 270 in 2007, and 310 in 2008.
d. 200 in 2006, 540 in 2007, and 620 in 2008.
28. Refer to Table 24-4. Using 2007 as the base year, the consumer price index is
a. 78.22 in 2006, 100 in 2007, and 121.10 in 2008.
b. 74.07 in 2006, 100 in 2007, and 114.81 in 2008.
c. 100 in 2006, 135 in 2007, and 155 in 2008.
d. 200 in 2006, 270 in 2007, and 310 in 2008.
29. Refer to Table 24-4. Using 2008 as the base year, the consumer price index is
a. 52.66 in 2006, 84.25 in 2007, and 106.5 in 2008.
b. 64.52 in 2006, 87.10 in 2007, and 100 in 2008.
c. 52.66 in 2006, 90.89 in 2007, and 100 in 2008.
d. 100 in 2006, 135 in 2007, and 155 in 2008.
30. Refer to Table 24-4. Using 2006 as the base year, the inflation rate is
a. 13.3 percent for 2007 and 14.8 percent for 2008.
b. 35 percent for 2007 and 14.8 percent for 2008.
c. 35 percent for 2007 and 55 percent for 2008.
d. 135 percent for 2007 and 155 percent for 2008.
31. 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.
32. In computing the consumer price index, a base year is chosen. Which of the following statements about the base year is
correct?
a. The base year is always the first year among the years for which computations are being made.
b. It is necessary to designate a base year only in the simplest case of two goods; in more realistic cases, it is not necessary
to designate a base year.
c. The value of the consumer price index is always 100 in the base year.
d. All of the above are correct.
33. Consider a small economy in which consumers buy only two goods -- apples and pears. In order to compute the consumer
price index for this economy for two or more consecutive years, we assume that
a. the number of apples bought by the typical consumer is equal to the number of pears bought by the typical consumer in
each year.
b. neither the number of apples bought by the typical consumer, nor the number of pears bought by the typical consumer,
changes from year to year.
c. the percentage change in the price of applies is equal to the percentage change in the price of pears from year to year.
d. All of the above are correct.
34. In calculating the consumer price index, a fixed basket of goods is used. The quantities of the goods in the fixed basket are
determined by
a. surveying consumers.
b. surveying sellers of those goods.
c. working backward from the rate of inflation to arrive at imputed values for those quantities.
d. arbitrary choices made by federal government employees.
35. In an imaginary economy, consumers buy only shirts and pants. The fixed basket consists of 6 shirts and 4 pairs of pants. A
shirt cost $20 in 2006 and $25 in 2007. A pair of pants cost $30 in 2006 and $40 in 2007. Using 2006 as the base year,
which of the following statements is correct?
a. For the typical consumer, the number of dollars spent on shirts is equal to the number of dollars spent on pants in each
of the two years.
b. The consumer price index is 134 in 2007.
c. The rate of inflation is 29.17% in 2007.
d. All of the above are correct.
36. 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. $2.50
b. $2.80
c. $3.20
d. $3.45
1018 ! Chapter 24/Measuring the Cost of Living
37. 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 inflation rate in 2007 was 16 percent, then how much did a magazine cost in 2007?
a. $2.08
b. $2.32
c. $2.50
d. $2.64
38. In an imaginary economy, consumers buy only hot dogs and hamburgers. The fixed basket consists of 10 hot dogs and 6
hamburgers. A hot dog cost $3 in 2006 and $5.40 in 2007. A hamburger cost $5 in 2006 and $6 in 2007. Which of the
following statements is correct?
a. When 2006 is chosen as the base year, the consumer price index is 90 in 2007.
b. When 2006 is chosen as the base year, the inflation rate is 150 percent in 2007.
c. When 2007 is chosen as the base year, the consumer price index is 100 in 2006.
d. When 2007 is chosen as the base year, the inflation rate is 50 percent in 2007.
39. Let 2004 be the base year; then
CPI in 2005 - CPI in 2004
a. Inflation rate in 2005 = ´ 100.
CPI in 2004
CPI in 2005 - CPI in 2004
b. Inflation rate in 2005 = ´ 100.
CPI in 2005
CPI in 2004 - CPI in 2005
c. Inflation rate in 2005 = ´ 100.
CPI in 2004
CPI in 2004 - CPI in 2005
d. Inflation rate in 2005 = ´ 100.
CPI in 2005
40. Let 2002 be the base year; then
CPI in 2005 - CPI in 2004
a. Inflation rate in 2005 = ´ 100.
CPI in 2002
CPI in 2005 - CPI in 2002
b. Inflation rate in 2005 = ´ 100.
CPI in 2005
CPI in 2005 - CPI in 2002
c. Inflation rate in 2005 = ´ 100.
CPI in 2004
CPI in 2005 - CPI in 2004
d. Inflation rate in 2005 = ´ 100.
CPI in 2004
41. 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.
42. If this year the CPI is 125 and last year it was 120, then
a. the cost of the CPI basket of goods and services has increased this year by 4.17 percent.
b. the price level as measured by the CPI has increased by 4.17 percent.
c. the inflation rate for this year is 4.17 percent.
d. All of the above are correct.
43. If this year the CPI is 110 and last year it was 100, then
a. the cost of the CPI basket of goods and services has increased this year by 110 percent.
b. the price level as measured by the CPI has increased by 10 percent.
c. the inflation rate for this year has increased by 10 percent over last year’s inflation rate.
d. All of the above are correct.
44. If the consumer price index was 100 in the base year and 107 in the following year, the inflation rate was
a. 107 percent.
b. 10.7 percent.
c. 7 percent.
d. 1.07 percent.
45. If the price index was 90 in year 1, 100 in year 2, and 95 in year 3, then the economy experienced
a. 10 percent inflation between years 1 and 2 ,and 5 percent inflation between years 2 and 3.
b. 10 percent inflation between years 1 and 2, and 5 percent deflation between years 2 and 3.
c. 11.1 percent inflation between years 1 and 2, and 5 percent inflation between years 2 and 3.
d. 11.1 percent inflation between years 1 and 2, and 5 percent deflation between years 2 and 3.
 Chapter 24/Measuring the Cost of Living ! 1019
46. The price index in the first year is 110, in the second year is 100, and in the third year is 96. The economy experienced
a. 9.1 percent deflation between the first and second years, and 4 percent deflation between the second and third years.
b. 9.1 percent deflation between the first and second years, and 9.6 percent deflation between the second and third years.
c. 10 percent deflation between the first and second years, and 4 percent deflation between the second and third years.
d. 10 percent deflation between the first and second years, and 8.7 percent deflation between the second and third years.
47. The price index in the first year is 150; in the second year it is 160; and in the third year it is 175. The inflation rate is about
a. 1.07 percent between the first and second years, and 1.09 percent between the second and third years.
b. 5.4 percent between the first and second years, and 9.4 percent between the second and third years.
c. 6.7 percent between the first and second years, and 9.4 percent between the second and third years.
d. 10 percent between the first and second years, and 1.09 percent between the second and third years.
48. The price index in the first year is 150; in the second year it is 160; and in the third year it is 165. Which of the following
statements is correct?
a. The price level was higher in the second year than in the first year, and it was higher in the third year than in the second
year.
b. The inflation rate was positive between the first and second years, and it was positive between the second and third
years.
c. The inflation rate was lower between the second and third years than it was between the first and second years.
d. All of the above are correct.
49. Suppose the price index in 2004 was 110; in 2005 it was 120; and in 2006 it was 125. Which of the following statements is
correct?
a. The economy experienced inflation between 2004 and 2005, and again between 2005 and 2006.
b. The inflation rate was positive between 2004 and 2005, and it was negative between 2005 and 2006.
c. The inflation rate was higher between 2005 and 2006 than it was between 2004 and 2005.
d. All of the above are correct.
50. Assume an economy experienced a higher inflation rate, as measured by the CPI, between 2004 and 2005 than it
experienced between 2003 and 2004. Which of the following scenarios is consistent with this assumption?
a. The CPI was 100 in 2003, 110 in 2004, and 120 in 2005.
b. The CPI was 100 in 2003, 110 in 2004, and 124 in 2005.
c. The CPI was 110 in 2003, 150 in 2004, and 200 in 2005.
d. All of the above are correct.
51. Assume an economy experienced a positive rate of inflation between 2003 and 2004 and again between 2004 and 2005.
However, the inflation rate was lower between 2004 and 2005 than it was between 2003 and 2004. Which of the following
scenarios is consistent with this assumption?
a. The CPI was 100 in 2003, 110 in 2004, and 105 in 2005.
b. The CPI was 100 in 2003, 120 in 2004, and 135 in 2005.
c. The CPI was 110 in 2003, 106 in 2004, and 100 in 2005.
d. All of the above are correct.
52. Suppose the price index in 2004 was 104; the price index in 2005 was 134; and the inflation rate between 2005 and 2006
was higher than it was between 2004 and 2005. This means that
a. the price index in 2006 was higher than 134.00.
b. the price index in 2006 was higher than 164.00.
c. the price index in 2006 was higher than 172.65.
d. the price index in 2006 was higher than 182.22.
53. Suppose the price index in 2004 was 100; the price index in 2005 was 118; and the inflation rate between 2005 and 2006
was lower than it was between 2004 and 2005. This means that
a. the price index in 2006 was lower than 118.00. 18% inflation in 2006 implies CPI in 2006 should have been
b. the price index in 2006 was lower than 136.00. 139.24.
c. the price index in 2006 was lower than 139.24.
d. the inflation rate between 2005 and 2006 was lower than 1.18 percent.
54. Which of these 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 three changes show the same rate of inflation.
55. Which of these changes in the price index produces the greatest rate of inflation: 106 to 112, 112 to 118, or 118 to 124?
a. 106 to 112
b. 112 to 118
c. 118 to 124
d. All three changes show the same rate of inflation.
56. Which of these changes in the price index produces the greatest rate of inflation: 80 to 100, 100 to 120, or 150 to 170?
1020 ! Chapter 24/Measuring the Cost of Living
a. 80 to 100
b. 100 to 120
c. 150 to 170
d. All of these changes show the same rate of inflation.
57. Between October 2001 and October 2002, the CPI in Canada rose from 116.5 to 119.8. In Mexico it rose from 97.2 to
102.3. What were the inflation rates for Canada and Mexico over this one-year period?
a. 3.3 percent for Canada and 6.7 percent for Mexico
b. 3.3 percent for Canada and 5.2 percent for Mexico
c. 2.8 percent for Canada and 6.7 percent for Mexico
d. 2.8 percent for Canada and 5.2 percent for Mexico
58. The price index in 2006 is 120, and in 2007 it is 127.2. What is the inflation rate?
a. 5.4 percent
b. 6.0 percent
c. 7.2 percent
d. The inflation rate is impossible to determine without knowing the base year.
59. The price index is 320 in one year and 360 in the next year. What was the inflation rate?
a. 6.7 percent
b. 8 percent
c. 12.5 percent
d. 40 percent
60. In a particular economy, the price index was 270 in 2005 and it was 300 in 2006 . Which of the following statements is
correct?
a. The economy experienced a rising price level between 2005 and 2006.
b. The economy experienced a higher inflation rate between 2005 and 2006 than it had experienced between 2004 and
2005.
c. The inflation rate between 2005 and 2006 was 30 percent.
d. All of the above are correct.
61. The price index was 92 in 2005 and, between 2005 and 2006, the inflation rate was 13 percent. The price index in 2006 was
a. 103.96.
b. 105.00.
c. 113.00.
d. None of the above is correct.
62. The price index was 128.96 in 2006 and, between 2005 and 2006, the inflation rate was 24 percent. The price index in 2005
was
a. 30.95.
b. 104.00.
c. 104.96.
d. 106.67.
63. To calculate the CPI, the Bureau of Labor Statistics uses
a. all prices of all goods and services produced domestically.
b. the prices of all final goods and services.
c. the prices of all consumer goods.
d. the prices of some consumer goods.
64. From 2004 to 2005, the CPI for medical care increased from 260.8 to 272.8. What was the inflation rate for medical care?
a. 12 percent
b. 11.1 percent
c. 4.9 percent
d. 4.6 percent
65. By far the largest category of goods and services in the CPI basket is
a. housing.
b. transportation.
c. food and apparel.
d. food and beverages.
66. For purposes of calculating the CPI, the “housing” category of consumer spending includes the cost of
a. shelter.
b. fuel and other utilities.
c. household furnishings and operation.
d. All of the above are correct.
67. In the basket of goods that is used to compute the consumer price index, the three most important categories of consumer
spending are
 Chapter 24/Measuring the Cost of Living ! 1021
a. housing, transportation, and entertainment.
b. housing, transportation, and food & beverages.
c. housing, medical care, and food & beverages.
d. education, medical care, and food & beverages.
68. Categories of U.S. consumer spending, ranked from largest to smallest, are
a. food and beverages, housing, transportation, and medical care.
b. medical care, housing, food and beverages, and transportation.
c. housing, food and beverages, transportation, and medical care.
d. housing, transportation, food and beverages, and medical care.
69. About what percentage of U.S. consumer spending is accounted for by expenditures on food and beverages?
a. 6 percent
b. 11 percent
c. 15 percent
d. 20 percent
70. Of the following categories of spending , which is relatively least important in terms of the magnitude of expenditures?
a. food and beverages
b. transportation
c. housing
d. apparel