Chapter 24 Review Questions

The consumer price index is used to

• track changes in the level of wholesale prices in the economy

• monitor changes in the cost of living

• monitor changes in the level of real GDP

• track changes in the stock market

The term inflation is used to describe a situation in which

• the overall level of prices in the economy is increasing

• incomes in the economy are increasing

• stock-market prices are rising

• the economy is growing rapidly

The CPI is calculated

• monthly by the Department of Commerce

• monthly by the Bureau of Labor Statistics

• quarterly by the Department of Commerce

• quarterly by the Bureau of Labor Statistics

The price index is 320 in one year and 360 in the next year. What was the inflation rate?

• 6.7 percent

• 8 percent

• 12.5 percent

• 40 percent

Answer explanation

360-320 = 40

40/320 x 100 = 12.5

By far the largest category of goods and services in the CPI basket is

• housing

• transportation

• food and apparel

• food and beverages

In the basket of goods that is used to compute the consumer price index, the three most important categories of consumer spending are

• housing, transportation, and entertainment

• housing, transportation, and food & beverages

• housing, medical care, and food & beverages

• education, medical care, and food & beverages

You know that a candy bar costs sixty cents today. You also know the CPI for 1962 and the CPI for today. Which of the following would you use to compute the price of the candy bar in 1962 prices?

• sixty cents times (today's CPI - 1962 CPI)

• sixty cents times (1962 CPI - today's CPI)

• sixty cents times (today's CPI/1962 CPI)

• sixty cents times (1962 CPI/today's CPI)

Grant Smith was a doctor in 1944 and earned $12,000 that year. The price index in 1944 was 17.6 and the price index in 2005 was 184. Grant Smith’s 1944 income in 2005 dollars is about

• $75,971

• $80,777

• $120,682

• $125,455

Answer explanation

$12000 x 184/17.6 =

$125,454.55 or about

$125,455

A COLA automatically raises the wage rate when

• GDP increases

• taxes increase

• the consumer price index increases

• the producer price index increases

Ruth collected Social Security payments of $220 a month in 1985. If the price index rose from 90 to 105 between 1985 and 1986, then her Social Security payments for 1986 should have been about

• $252.43

• $253.00

• $256.67

• None of the other answers are correct

Answer explanation

$220 x 184/17.6 =

$256.67