The CPI and the Cost of Living

2. 23 The CPI and the Cost of Living CLICKER QUESTIONS

3. Checkpoint 23.3 Checkpoint 23.1 Checkpoint 23.2 Question 1 Question 4 Question 8 Question 2 Question 5 Question 9 Question 6 Question 3 Question 10 Question 7

4. CHECKPOINT 23.1 Question 1 The Consumer Price Index (CPI) measures ________. • the average price of all the goods and services that consumers buy • the prices of the consumption goods and services that have increased • the average of the prices paid by urban consumers for a fixed market basket of goods and services • consumer confidence in the economy • the average of the costs paid by businesses to produce a fixed market basket of consumption goods and services

5. CHECKPOINT 23.1 Question 2 Suppose that at base period prices, the market basket of consumption goods and services costs $180 and at current period prices the same market basket of goods and services costs $300. The CPI in the current period is ____. • 166.7 • 66.7 • 120.0 • 60.0 • 300.0

6. CHECKPOINT 23.1 Question 3 If in June 2009, the CPI was 82.3 and in 2010, it was 90.9, then the inflation rate in 2010 was _______. • 10.4 percent • 8.6 percent • 90.9 percent • 82.3 percent • 9.09 percent

7. CHECKPOINT 23.2 Question 4 Joe buys chicken and beef. If the price of beef rises and the price of chicken falls, Joe will buy ____ in the CPI. • more beef and create a new goods bias • more chicken and create a commodity substitution bias • the same quantity of beef and chicken and create a commodity substitution bias • less chicken and beef and create a quality change bias • more chicken and eliminate the commodity substitution bias

8. CHECKPOINT 23.2 Question 5 Which of the following statements is true? • The CPI is an accurate measure of the cost of living. • The GDP price index is a good alternative to the CPI as a measure of the cost of living. • The core inflation rate is the inflation rate of energy and food prices. • The PCE inflation rate is generally lower than the CPI inflation rate. • The core inflation rate exceeds the CPI inflation rate.

9. CHECKPOINT 23.2 Question 6 A consequence of the CPI bias is that it _______. • decreases government outlays • increases international competition • reduces outlet substitution bias • distorts private contracts • is impossible to measure the inflation rate

10. CHECKPOINT 23.2 Question 7 The price of dishwashers has increased while at the same time the quality of a dishwasher has improved. The BEA ______. • adjusts the CPI basket monthly to reflect the improved quality • selects a new CPI basket every month • uses a process that eliminates any upward bias in the CPI • does the best job it can to estimate the effect of the improved quantity on the price • does not take account of any quality changes because the CPI is not an index of quality

11. CHECKPOINT 23.3 Question 8 In 2011, apples cost $1.49 a pound. The CPI was 120 in 2011 and 140 in 2012. If the real price in 2012 was the same as in 2011, the price apples in 2010 was _______. • $2.74 a pound • $1.69 a pound • $1.66 a pound • $1.74 a pound • $1.28 a pound

12. CHECKPOINT 23.3 Question 9 Personal saving was $534.2 billion in December 2009, compared with $506.3 billion in November 2009. The PCE price index increased 0.1 percent in December, compared with 0.3 percent in November. In December, real personal saving ______. • decreased because the PCE price index rose • increased because all personal saving is real • increased because the inflation rate fell • increased because the PCE price index rose by less than the increase in personal saving • was the same as it was in November

13. CHECKPOINT 23.3 Question 10 You borrow at a nominal interest rate of 10 percent a year. If the inflation rate is 4 percent a year, then you pay a real interest rate of ________. • 0 percent a year • 6 percent a year • 2.5 percent a year • 16 percent a year • 14 percent a year