Chapter 11 Quiz example #2910

Bob deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Bob withdraws his $105. If inflation was 2 percent during the year the money was deposited, then Bob's purchasing power has increased.

Suppose the CPI in 1950 was 24.1 and the CPI in 1975 was 53.8. When Ken's income rose from $10,000 per year in 1950 to $20,000 per year in 190, Ken's standard of living improved between 1950 and 1970.

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

The purpose of measuring the overall level of prices in the economy is to permit comparison between dollar figures from different times.

When the price of nuclear missiles rises, this change is reflected in the CPI but not in the GDP deflator.

Changes in consumer price index are useful in predicting changes in producer price index.

When some dollar amount is automatically corrected for changes in the price level by law or contract, the amount is said to be indexed for inflation.

A COLA automatically raises the wage when the CPI rises.

A consumer price index is used to: A. monitor changes in the level of wholesale prices in the economy. B. monitor changes in the cost of living over time. C. monitor changes in the level of real GDP over time. D. monitor changes in the stock market.

The CPI is always 1 in the base year.

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.

The inflation rate for 2007 is computed by dividing (the CPI in 2007 minus the CPI in 2006) by the CPI in 2006, then multiplying by 100.

The CPI for 2008 is computed by dividing the price of the basket of goods and services in 2008 by the price of the basket of goods and services in the base year, then multiplying by 100.

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

The Bureau of Labor Statistics determines which prices are most important to the typical consumer by surveying consumers.

Data from the Bureau of Labor Statistics show that consumer spending on medical care is about equal to consumer spending on housing.

The real interest rate measures the change in dollar amounts.

If the nominal interest rate is 5 percent and the real interest rate is 2 percent, then the inflation rate is 3 percent.

Substitution bias causes the CPI to understate the increase in the cost of living from one year to the next.

Persistent increases in the overall level of prices have been the norm.