Cost of Living

The CPI is a measure of the overall cost of the goods and services bought by

• a typical firm.
• the government.
• a typical consumer.
• All of the above are correct.

What basket of goods and services is used to construct the CPI?

• a random sample of all goods and services produced in the economy
• the goods and services that are typically bought by consumers as determined by government surveys
• only food, clothing, transportation, entertainment, and education
• the least expensive and the most expensive goods and services in each major category of consumer expenditures

Suppose that the prices of dairy products have risen relatively less than prices in general over the last several years.  To which problem in the construction of the CPI is this situation most relevant?

• substitution bias
• introduction of new goods
• unmeasured quality change
• income bias

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

• new goods and services are always of higher quality than existing goods and services.
• new goods and services cost less than existing goods and services.
• new goods and services cost more than existing goods and services.
• when a new good is introduced, it gives consumers greater choice, thus reducing the amount they must spend to maintain their standard of living.

Which of the following statements about real and nominal interest rates is correct?

• Real interest rates can be either positive or negative, but nominal interest rates must be positive.
• Real interest rates and nominal interest rates must be positive.
• Real interest rates must be positive, but nominal interest rates can be either positive or negative.
• Real interest rates and nominal interest rates can be either positive or negative.

If the nominal interest rate is 8 percent and the real interest rate is 5.5 percent, then the inflation rate is

• -2.5 percent.
• 0.45 percent.
• 2.5 percent.
• 13.5 percent.

The consumer price index is used to

• monitor changes in the level of wholesale prices in the economy.
• monitor changes in the cost of living over time.
• monitor changes in the level of real GDP over time.
• monitor changes in the stock market.

When ranking movies by nominal box office receipts, what important fact is overlooked?

• More people go to movies now than in the past.
• There are no good substitutes for movies currently.
• Prices, including those for movie tickets, have been rising over time.
• Movies and DVD are complements.

Suppose the price of a quart of milk rises from $1.00 to $1.20 and the price of a T-shirt rises from $8.00 to $9.60.  If the CPI rises from 150 to 195, then people likely will buy

• more milk and more T-shirts.
• more milk and fewer T-shirts.
• less milk and more T-shirts.
• less milk and fewer T-shirts.

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

• new goods and services are always of higher quality than existing goods and services.
• new goods and services cost less than existing goods and services.
• new goods and services cost more than existing goods and services.
• when a new good is introduced, it gives consumers greater choice, thus reducing the amount they must spend to maintain their standard of living.