Chapter 6 Measuring the Cost of Living PDF

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Chapter 6 - Measuring the Cost of Living 1. Babe Ruth, the famous baseball player, earned $80,000 in 1931. Today, the best baseball players can earn 200 times as much as Babe Ruth in 1931. Are the best baseball players better off than Babe Ruth? a. Yes, the best baseball players today are better off than Babe Ruth was in 1931 because they earn much more. b.No, because prices have also risen. c. It cannot be determined because one cannot make judgments about changes in the standard of living based on changes in prices and changes in incomes. d.It cannot be determined without additional information regarding increases in prices since 1931. ANSWER: d 2. How does a rise in the consumer price index affect a typical family? a. The typical family has to spend more dollars to maintain the same standard of living. b. The typical family can spend fewer dollars to maintain the same standard of living. c. The typical family finds that its standard of living is not affected. d. The typical family can offset the effects of rising prices by saving more. ANSWER: a 3. Which of the following is the consumer price index used for? a. to track changes in the level of wholesale prices in the economy b. to monitor changes in the cost of living c. to monitor changes in the level of real GDP d. to track changes in the stock market ANSWER: b 4. Which of the following is the consumer price index used for? a. to differentiate between gross national product and gross domestic product b. to turn dollar figures into meaningful measures of purchasing power c. to characterize the types of goods and services that consumers purchase d. to measure the quantity of goods and services that the economy produces ANSWER: b 5. Which situation is described by the term “inflation”? 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. Nominal interest rates in the economy are rising. ANSWER: a 6. When the overall level of prices in the economy is increasing, what is the economy experiencing? a. economic b. inflation Copyright Cengage Learning. Powered by Cognero.

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Chapter 6 - Measuring the Cost of Living growth c. unemployment ANSWER: b

d. deflation

7. What best defines the inflation rate? a. the price level b. the change in the price level c. the price level divided by the price level in the previous period d. the percentage change in the price level from the previous period ANSWER: d 8. What does the CPI measure? a. the overall price of inputs purchased by a typical producer b. the overall price of goods and services bought by a typical consumer c. the overall price of goods and services produced in the economy d. the overall price of shares on the Toronto Stock Exchange ANSWER: b 9. Which agency calculates the CPI? a. the Canadian Bureau of Labour Statistics c. Statistics Canada ANSWER: c

b. the Department of Consumer Affairs d. the Bank of Canada

10. How often is the CPI calculated? a. weekly b. monthl y d. yearly c. quarterl y ANSWER: b 11. What is the basket of goods used to construct the CPI? a. a random sample of all goods and services produced in the economy b. the goods and services typically bought by consumers, according to Statistics Canada surveys c. goods and services weighted by the ratio of expenditures on them relative to the consumption component of GDP d. the average price of goods and services in each major category of consumer expenditures ANSWER: b 12. Which goods are supposed to be included in the CPI? a. all goods and services produced in the economy Copyright Cengage Learning. Powered by Cognero.

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Chapter 6 - Measuring the Cost of Living b. all goods and services that typical consumers buy c. all goods and services in the consumption component of the GDP accounts d. all the goods, but not the services, in the consumption component of the GDP accounts ANSWER: b 13. In the CPI, how are goods and services weighted? a. according to how much consumers buy of each item b. according to whether the goods and services are necessities or luxuries c. according to the levels of production of the goods and services in the domestic economy d. according to the expenditures on them in the GDP national income accounts ANSWER: a 14. How are the weights on the various goods and services in the CPI basket determined? a. Each good and service is weighted according to its quantity. b.A survey is conducted to determine how much of each good and service typical consumers purchase. c. The weights equal the ratio of expenditures on each good or service divided by the total consumption expenditures in the GDP accounts. d.Each good and service is weighted according to its price. ANSWER: b 15. In sequence, what are the steps involved in calculating the consumer price index and the inflation rate? a. Choose a base year, determine the basket, compute the index, compute the basket’s cost, and compute the inflation rate. b.Choose a base year, find the prices, determine the basket, compute the basket’s cost, and compute the inflation rate. c. Determine the basket, find the prices, compute the basket’s cost, choose a base year and compute the index, and compute the inflation rate. d.Determine the basket, find the prices, compute the index, choose a base year, and compute the inflation rate. ANSWER: c Table 6-1 Year 2018 2019

Peaches $10 per bushel $8 per bushel

Apples $7 per bushel $11 per bushel

16. Refer to Table 6-1. Suppose that the typical consumer basket consists of 5 bushels of peaches and 10 bushels of apples and that the base year is 2018. What is the consumer price index for 2018? a. 80 b. 100 c. 120 d. 125 ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 6 - Measuring the Cost of Living 17. Refer to Table 6-1. Suppose that the typical consumer basket consists of 5 bushels of peaches and 10 bushels of apples and that the base year is 2018. What is the consumer price index for 2019? a. 80 b. 100 c. 120 d. 125 ANSWER: d 18. Refer to Table 6-1. What was the inflation rate in 2019? b. 25 percent a. 20 percent c. 30 d. 80 percent percent ANSWER: b Table 6-2 Year 2018 2019

Price of pork $15 $20

Price of corn $10 $15

19. Refer to Table 6-2. Suppose that 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 2019 if the base year is 2018? a. 70.83 b. 120.00 c. 141.18 d. 312.50 ANSWER: c 20. Refer to Table 6-2. Suppose that the basket of goods in the CPI consisted of 3 units of pork and 4 units of corn. What is the inflation rate for 2019? a. 4.76 percent b. 25.00 percent c. 40.00 d. 41.18 percent percent ANSWER: d 21. The market basket used to calculate the CPI in Aquilonia is: four loaves of bread six litres of milk, two shirts, and two pairs of pants. Last year, the price of bread was $1.00 per loaf, the price of milk was $1.50 per litre, the price of a shirt was $6.00, and the price of a pair of pants was $10.00. This year, the price of bread is $1.50 per loaf, the price of milk is $2.00 per litre, Copyright Cengage Learning. Powered by Cognero.

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Chapter 6 - Measuring the Cost of Living the price of a shirt is $7.50, and the price of a pair of pants is $13.00. What is the inflation rate, as measured by the CPI, for Aquilonia between last year and this year? b. 24.4 percent a. 20.00 percent d. 35.56 percent c. 30.00 percent ANSWER: d Table 6-3 In the country of Shem, the CPI is calculated using a market basket consisting of 5 peaches, 4 kg of fish, 3 shorts, and 2 litres of milk. The per-unit prices of these goods have been as follows: Year 2016 2017 2018 2019

Peaches $1.00 $2.00 $2.00 $3.00

Fish $2.00 $1.50 $2.00 $3.00

Shorts $10.00 $8.00 $11.00 $14.00

Milk $1.00 $1.50 $2.00 $3.00

22. Refer to Table 6-3. What was the inflation rate, as measured by the CPI, between 2016 and 2017? b. –7.14 percent a. –4.44 percent c. 3.75 percent d. 11.25 percent ANSWER: a 23. Refer to Table 6-3. What was the inflation rate, as measured by the CPI, between 2017 and 2018? b. 34.1 a. 27.9 percent percent d. 48.5 c. 47.0 percent percent ANSWER: a 24. Refer to Table 6-3. What was the inflation rate, as measured by the CPI, between 2018 and 2019? b. 55.4 percent a. 36.36 percent c. 77.8 percent d. 140.2 percent ANSWER: a 25. For the CPI, what is the base year? a. It is the benchmark against which other years are compared, and it changes each year. b. It is the benchmark against which other years are compared, and it changes occasionally. c. It is the year the CPI first appeared. d. It is the year prior to the year for which the CPI is calculated. Copyright Cengage Learning. Powered by Cognero.

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Chapter 6 - Measuring the Cost of Living ANSWER: b 26. For any given year, what is the CPI? a. the price of the basket of goods and services in the given year divided by the price of the basket in the base year, then multiplied by 100 b.the price of the basket of goods and services in the given year divided by the price of the basket in the previous year, then multiplied by 100 c. the price of the basket of goods and services in the base year divided by the price of the basket in the given year, then multiplied by 100 d.the price of the basket of goods and services in the previous year divided by the price of the basket in the given year, then multiplied by 100 ANSWER: a 27. How is the inflation rate calculated? a. by surveying consumer spending b. by adding up the price increases of all goods and services c. by computing a simple average of the price increase in all goods and services d. by determining the percentage increase in the price index from the preceding period ANSWER: d 28. If this year the CPI is 125 and last year it was 120, what do we know? a. Most goods have become more expensive. b. The price level has increased. c. The inflation rate has increased. d. Some goods have become cheaper. ANSWER: b 29. If the consumer price index was 100 in the base year and 112 the following year, what was the inflation rate? b. 11.2 percent a. 1.2 percent c. 12 percent d. 112 percent ANSWER: c 30. If the price index in the first year was 80, in the second year was 100, and in the third year was 90, what did the economy experience? a. 20 percent inflation between the first and second years and 10 percent inflation between the second and third years b. 20 percent inflation between the first and second years and 10 percent deflation between the second and third years c. 25 percent inflation between the first and second years and 10 percent inflation between the second and third years d. 25 percent inflation between the first and second years and 10 percent deflation between the second and third years Copyright Cengage Learning. Powered by Cognero.

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Chapter 6 - Measuring the Cost of Living ANSWER: d 31. The price index in the first year is 100, in the second year is 90, and in the third year is 80. What is the deflation rate between the first and second year, and between the second and third year? a. 11 percent between the first and second year, 11 percent between the second and third year b. 11 percent between the first and second year, 12 percent between the second and third year c. 10 percent between the first and second year, 11 percent between the second and third year d. 10 percent between the first and second year, 12 percent between the second and third year ANSWER: c 32. The price index in the first year is 120, in the second year is 150, and in the third year is 180. What is the inflation rate between the first and second year and between the second and third year? a. 20 percent between the first and second year, 33 percent between the second and third year b. 25 percent between the first and second year, 20 percent between the second and third year c. 25 percent between the first and second year, 50 percent between the second and third year d. 30 percent between the first and second year, 30 percent between the second and third year ANSWER: b 33. Which change in the price index shows the greatest rate of inflation? a. 100 to 115 b. 150 to 180 d. 220 to c. 180 to 210 255 ANSWER: b 34. Which change in the price index shows the greatest rate of inflation? a. 80 to 100 b. 100 to 120 d. 200 to c. 150 to 170 220 ANSWER: a 35. From October 2018 to October 2019, the CPI in country A rose from 116.5 to 119.8. In country B, it rose from 97.2 to 102.3. What were the inflation rates in the two countries? a. 3.3 percent in A and 6.7 percent in B b. 3.3 percent in A and 5.2 percent in B c. 2.8 percent in A and 6.7 percent in B d. 2.8 percent in A and 5.2 percent in B ANSWER: d Copyright Cengage Learning. Powered by Cognero.

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Chapter 6 - Measuring the Cost of Living 36. The price index in 2018 is 130, and in 2019 it is 143. What is the inflation rate? b. 10 percent a. 1.01 percent c. 13 percent d. 43 percent ANSWER: b 37. The price index is 320 in one year and 380 in the next. What was the inflation rate? a. 6.7 percent b. 8.8 percent d. 18.8 c. 12.5 percent percent ANSWER: d 38. The price index is 260 in one year and 300 in the next. What is the inflation rate? a. 1.0 b. 9.3 percent percent c. 12 percent d. 15.3 percent ANSWER: d 39. The price index is 180 in one year and 210 in the next. What is the inflation rate? a. 11percent b. 14.3 percent d. 30 percent c. 16.7 percent ANSWER: c 40. Which price changes when an inflation rate is calculated using the CPI? a. all prices b. the prices of all final goods and services d. the prices of some consumer goods c. the prices of all consumer goods ANSWER: d 41. From one year to the next, the CPI for medical care rose from 261.8 to 275.8. What was the inflation rate for medical care? a. 4.9 percent b. 5.35 percent c. 11.1 percent d. 12.0 percent ANSWER: b Table 6-4 This table shows the CPI for various categories of goods and services. Food and Beverages

Year 1 168.4

Year 2 173.6

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Chapter 6 - Measuring the Cost of Living Housing Transportation Gasoline

169.6 153.3 139.6

176.2 154.3 141.4

42. Refer to Table 6-4. Among these categories, what was the highest rate of inflation? b. 3.9 a. 3.1 percent percent c. 5.2 d. 6.6 percent percent ANSWER: b 43. Refer to Table 6-4. Of those categories, which one had the lowest rate of inflation? b. housing a. food and beverages c. gasoline d. transportatio n ANSWER: d Table 6-5 This table pertains to an economy with only two goods: shorts and t-shirts. The fixed basket consists of 5 shorts and 10 tshirts. Year 2017 2018 2019

Price of Shorts $24 $30 $32

Price of T-shirts $8 $12 $15

44. Refer to Table 6-5. Using 2017 as the base year, what is the consumer price index? b. 100 in 2017, 270 in 2018, and 310 in a. 100 in 2017, 135 in 2018, and 155 in 2019 2019 d. 200 in 2017, 540 in 2018, and 620 in c. 200 in 2017, 270 in 2018, and 310 in 2019 2019 ANSWER: a 45. Refer to Table 6-5. Using 2018 as the base year, what is the consumer price index in 2017? a. 74.07 b. 77.78 c. 78.22 d. 135.00 ANSWER: a 46. Refer to Table 6-5. Using 2019 as the base year, what is the consumer price index? a. 52.66 in 2017, 84.25 in 2018, and 106.50 in 2019 b. 64.52 in 2017, 87.10 in 2018, and 100.00 in 2019 c. 52.66 in 2017, 90.89 in 2018, and 100.00 in 2019 d. 100.00 in 2017, 135.00 in 2018, and 155.00 in 2019 ANSWER: b Copyright Cengage Learning. Powered by Cognero.

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Chapter 6 - Measuring the Cost of Living 47. Refer to Table 6-5. Using 2017 as the base year, what is the inflation rate? a. 13.3 percent for 2018 and 14.8 percent for 2019 b. 13.3 percent for 2018 and 55.0 percent for 2019 c. 35.0 percent for 2018 and 14.8 percent for 2019 d. 35.0 percent for 2018 and 55.0 percent for 2019 ANSWER: c 48. Which of the following is by far the largest category of goods and services in the CPI basket? a. shelter b. clothing and footwear d. food c. household operations and furnishings ANSWER: a 49. What are the categories of Canadian consumer spending, ranked from largest to smallest? a. food, alcoholic beverages and tobacco products, shelter, transportation, and health and personal care b. food, health and personal care, shelter, alcoholic beverages and tobacco products, and transportation c. shelter, food, alcoholic beverages and tobacco products, transportation, and health and personal care d. shelter, transportation, food, health and personal care, and alcoholic beverages and tobacco products ANSWER: d 50. For the average Canadian consumer, what percentage of spending does food make up? a. 5.3 percent b. 9.4 percent c. 11.0 percent d. 16.2 percent ANSWER: d 51. Which of the following makes up the smallest category of consumer spending in Canada? a. food b. transportation d. shelter c. alcoholic beverages and tobacco products ANSWER: c 52. For the average Canadian consumer, what percentage of total consumption does shelter and food expenditures make up, respectively? a. 27.2, 16.2 b. 14.1, 17.5 c. 19.3, 18.1 d. 16.6, 19.7 Copyright Cengage Learning. Powered by Cognero.

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Chapter 6 - Measuring the Cost of Living ANSWER: a 53. If the cost of shelter increases by 10 percent, then, other things the same, how much is the CPI likely to increase? a. by about 1 b. by about 3 percent percent d. by about 10 c. by about 7 percent percent ANSWER: b 54. If the cost of health and personal care increases by 20 percent, then, other things the same, how much is the CPI likely to increase? b. by about 2 a. by about 1 percent percent c. by about 3 d. by about 4 percent percent ANSWER: a 55. If the cost of transportation and the cost of food both increase by 25 percent, then, other things the same, how much is the CPI likely to increase? a. by about 3 b. by about 6 percent percent d. by about 11 percent c. by about 8 percent ANSWER: d 56. Which of the following is NOT included in the rate of core inflation? a. all foreign-produced goods b. any good that makes up less than 10 percent of the CPI basket of goods c. the most volatile components from the CPI basket of goods and services d. the least volatile components from the CPI basket of goods and services ANSWER: c 57. What is the goal of the consumer price index? a. to measure changes in the costs of production b. to measure changes in the cost of living c. to measure changes in the relative prices of consumer goods d. to measure changes in the production of consumer goods ANSWER: b 58. Which statement best characterizes the consumer price index? a. It is a measure of a nation’s standard of living. b. It shows production of consumer goods. c. It measures the increase in the prices of all final goods and services produced within Copyright Cengage Learning. Powered by Cognero.

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Chapter 6 - Measuring the Cost of Living the borders of a country. d. It is an imperfect measure of the cost of living. ANSWER: d 59. 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 d. unmeasured wage changes change ANSWER: d 60. What does “substitution bias” in the consumer price index refer to? a. replacing...