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Exam 11: Measuring the Cost of Living

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Question 21

True/False

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The U.S. economy has never experienced deflation.

A) True
B) False

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Question 22

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Suppose that over the past year, the real interest rate was 6 percent and the inflation rate was -2 percent. It follows that

A) the dollar value of savings increased at 4 percent, and the purchasing power of savings increased at 6 percent.
B) the dollar value of savings increased at 4 percent, and the purchasing power of savings increased at 8 percent.
C) the dollar value of savings increased at 8 percent, and the purchasing power of savings increased at 4 percent.
D) the dollar value of savings increased at 8 percent, and the purchasing power of savings increased at 6 percent.

E) A) and C)
F) A) and B)

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Question 23

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When box office receipts are not corrected for inflation, the most popular movie of all time is

Price indexes allow comparisons of dollar figures over time and provide us a sense of how the economy is changing.

Which is likely to have the larger effect on the CPI, a 2 percent increase in the price of food or a 3 percent increase in the price of diamond rings? Explain.

If the real interest rate is 5 percent and the inflation rate is 2 percent, then the nominal interest rate is 7 percent.

Scenario 11-4 Quinn has job offers in Wrexington and across the country in Charlieville. The Wrexington job would pay a salary of $50,000 per year, and the Charlieville job would pay a salary of $40,000 per year. The CPI in Wrexington is 150, and the CPI in Charlieville is 90. -Refer to Scenario 11-4. The Charlieville salary in Wrexington dollars is

Which of these events would cause the consumer price index to overstate the increase in the cost of living?

In computing the consumer price index, a base year is chosen. Which of the following statements about the base year is correct?

Table 11-1 The table below pertains to Pieway, an economy in which the typical consumer's basket consists of 10 bushels of peaches and 15 bushels of pecans. $\begin{array} { | c | c | c | } \hline \text { Year } & \begin{array} { c } \text { Price of } \\\text { Peaches }\end{array} & \begin{array} { c } \text { Price of } \\\text { Pecans }\end{array} \\\hline 2005 & \$ 11 \text { per bushd } & \$ 6 \text { per bushel } \\\hline 2006 & \$ 9 \text { per bushed } & \$ 10 \text { per bushe } \\\hline\end{array}$ -Refer to Table 11-1. If 2006 is the base year, then the inflation rate in 2006 was

One of the widely acknowledged problems with using the consumer price index as a measure of the cost of living is that the CPI

The value of the consumer price index increased from 140 to 147 during 2006. Nathan opened a bank account at the beginning of 2006, and at the end of 2006 his account balance was $12,840. The purchasing power of Nathan's account increased by 2 percent during the year. We can conclude that Nathan opened his account with a deposit of $11,500 at the beginning of 2006.

Suppose that over the past year, the real interest rate was 6 percent and the inflation rate was 4 percent. It follows that

The term inflation is used to describe a situation in which

For an imaginary economy, the consumer price index was 115.00 in 2004, 126.50 in 2005, and 136.62 in 2006. Which of the following statements is correct?

For purposes of calculating the CPI, the apparel category of consumer spending includes the cost of

Scenario 11-3 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 2008. The price index was 17.6 in 1944 and 184 in 2008. -Refer to Scenario 11-3. In real terms, Josh Holloway's income amounts to about what percentage of Sue Holloway's income?

For the purpose of calculating the consumer price index, the basket of goods

There is no longer much debate among economists concerning the severity of and the solution to the problems in using the CPI to measure the cost of living.

Table 11-12. Will's expenditures on food for three consecutive years, along with other values, are presented in the table below. -Refer to Table 11-12. To the nearest dollar, Will's 2010 food expenditures in 2009 dollars amount to