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chapter 6 practice problem with answer.pdf

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Department
Economics
Course Code
ECON 1BB3
Professor
Bridget O' Shaughnessy

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Name: ________________________ Class: ___________________ Date: __________ ID: A Problem Set Chapter 6 Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. ____ 1. 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. ____ 2. 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. ____ 3.Th 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. ____ 4.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. ____ 5. What basket of goods is used to construct the CPI? a. a random sample of all goods and services produced in the economy b. the goods and services that are typically bought by consumers as determined by government surveys c. only food, clothing, transportation, entertainment, and education d. the least expensive and the most expensive goods and services in each major category of consumer expenditures ____ 6. In the 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. ____ 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. 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. 1 Name: ________________________ ID: A ____ 9. 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抯 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 ____ 10. 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. ____ 11. 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 ____ 12. 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. ____ 13. 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. ____ 14. 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. 2 Name: ________________________ ID: A ____ 15. 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 ____ 16. 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. ____ 17. 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. ____ 18. 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. ____ 19. 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. ____ 20. Which of these changes in the price index produces the greatest rate of inflation: 80 to 100, 100 to 120, or 150 to 170? a. 80 to 100 b. 100 to 120 c. 150 to 170 d. All of these changes show the same rate of inflation. ____ 21. 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. ____ 22. 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. 3 Name: ________________________ ID: A ____ 23. 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. ____ 24. The goal of the consumer price index is to measure changes in the a. costs of production b. cost of living. c. relative prices of consumer goods. d. production of consumer goods. ____ 25. Which of the following is not a widely acknowledged problem with the CPI as a measure of the cost of living? a. substitution bias b. introduction of new goods c. unmeasured quality change d. unmeasured price change ____ 26. One of the widely-acknowledged problems with the consumer price index (CPI) as a measure of the cost of living is that the CPI a. fails to account for consumer spending on housing. b. accounts only for consumer spending on food, clothing, and energy. c. fails to account for the fact that consumers spend larger percentages of their incomes on some goods and smaller percentages of their incomes on other goods. d. fails to account for the introduction of new goods. ____ 27. Suppose the price of gasoline increases rapidly, and that consumers respond by buying a smaller quantity of gasoline. The consumer price index a. reflects this price increase accurately. b. understates the price increase due to the so-called income bias. c. overstates the price increase due to the so-called income bias. d. overstates the price increase due to the so-called substitution bias. ____ 28. 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. ____ 29. Suppose the price of a gallon of ice cream rises from $4 to $5 and the price of coffee rises from $2 to $2.50 . If the CPI rises from 150 to 200, then people likely will buy a. more ice cream and more coffee. b. more ice cream and less coffee. c. less ice cream and more coffee. d. less ice cream and less coffee. ____ 30. Because the CPI is based on a fixed basket of goods, the introduction of new goods and services in the economy causes the CPI to overestimate the cost of living. This is so because a. new goods and services are always of higher quality than existing goods and services. b. new goods and services cost less than existing goods and services. c. new goods and services cost more than existing goods and services. d. when a new good is introduced, it gives consumers greater choice, thus reducing the amount they must spend to maintain their standard of living. 4 Name: ________________________ ID: A ____ 31. When the quality of a good deteriorates, 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. ____ 32. Which of the following is the most accurate statement about the effects of quality change on the CPI? a. Even though the BLS adjusts prices of products in the CPI basket when the quality of the products change, changes in quality are still a problem, because quality is so hard to measure. b. Because the BLS adjusts prices of products in the CPI basket when the quality of the products change, changes in quality are no longer a problem for the CPI. c. The BLS does not adjust the CPI for quality changes. d. Most economists believe that changes in the quality of goods included in the CPI basket do not bias the CPI as a measure of the cost of living. ____ 33. Suppose that dairy products have risen in price relatively less than prices in general over the last several years. To which problem in the construction of the CPI is this 搇ow? rate of price increase most relevant? a. substitution bias b. introduction of new goods c. unmeasured quality change d. income bias ____ 34. For some racquet sports there have been increases in the size of the racquets; also, the methods and materials used for making racquets have improved. To which problem in the construction of the CPI are these facts most relevant? a. substitution bias b. introduction of new goods c. unmeasured quality change d. income bias ____ 35. Samantha goes to the grocery store to make her monthly purchase of ginger ale. As she enters the soft drink section, she notices that the price of ginger ale has increased 15 percent, so she decides to buy some peppermint tea instead. To which problem in the construction of the CPI is this situation most relevant? a. substitution bias b. introduction of new goods c. unmeasured quality change d. income effect ____ 36. Most studies in the 1990s concluded that the consumer price index overstated inflation by about a. 3 percentage points, and that number of percentage points likely still applies now. b. 3 percentage points, but improvements in recen
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