CH 24

Inflation is a:

• a. rise in the economic growth rate.

• b. decrease in the overall level of prices.

• c. fall in the quality of a product.

• d. rise in the overall level of prices.

The consumer price index is an index that tracks the:

• a. price that businesses pay over time for the inputs used in the production process.

• b. average price that consumers pay over time for a representative basket of goods and services.

• c. highest prices consumers pay over time for imported goods and services.

• d. price of all goods and services produced domestically.

The Producer Price Index is an index that tracks the:

• a. price that businesses pay over time for the inputs used in the production process.

• b. average price that consumers pay over time for a representative basket of goods and services.

• c. highest prices consumers pay over time for imported goods and services.

• d. price of all goods and services produced domestically.

Which of the following correctly shows the steps needed to calculate the inflation rate?

• a. Find the total value of the basket of goods and services, assess quality changes from one period to the next, and measure the inflation rate.

• b. Tally up the cost of the basket of goods and services, subtract the value of goods and services that are no longer counted in the basket, and then calculate the inflation rate.

• c. Find out what people typically buy, collect the prices from the stores where people shop, tally up the cost of the basket of goods and services, and calculate the inflation rate.

• d. Collect prices from the stores where people shop, assess the substitution that people make from low inflation to high inflation products, and calculate the difference in the prices that people pay.

Suppose that a CPI basket includes avocadoes, pineapples and oranges. Avocadoes become very expensive, and consumers substitute away from avocadoes and buy hummus instead. If the CPI basket does not change to reflect the move away from avocados, the result is:

• a. understated inflation.

• b. the failure to capture real variables versus nominal variables.

• c. substitution bias.

• d. quality bias.

The table shows consumer price index data for the United Kingdom. Based on this information, what is the rate of inflation in 2018?

• a. 2.32%

• b. 0.40%

• c. 1.43%

• d. 2.57%

If you see that the consumer price index this year is lower than the consumer price index last year, this means that:

• a. the consumer price index is lower than the producer price index.

• b. the prices of each and every good and service went down.

• c. economic growth also decreased.

• d. on average, prices went down across the economy.

Which of the following is an example of someone who is experiencing money illusion?

• a. The CPI in an economy has decreased by 5%, but Vivian will not accept lower nominal wages because she believes this is unfair.

• b. The CPI in an economy has increased by 2.3%, and Paul's nominal wage is increased by 2.3%.

• c. Darren sees that prices in the economy have risen by 2% and that the nominal interest rate on his savings account rose 0.5%. So Darren knows he is experiencing a 1.5% decrease in his real interest earnings.

• d. Prices have not changed in the economy, so your boss does not give you a raise.

Consider the following basket of goods: 50 hamburgers, 10 textbooks, eight T-shirts, and 100 bottles of water. Suppose that in 2015, each hamburger was $3.50, each textbook was $89.99, each T-shirt was $14, and each bottle of water was $1.50. In 2016, each hamburger was $3.60, each textbook was $95, each T-shirt was $13, and each bottle of water was $1.65. What was the value of the basket in 2016?

• a. $5,737

• b. $100

• c. $1,337

• d. $1,400

Which of the following explains why the price of a product might rise from one year to the next?(i) an increase in quality(ii) industry pricing trends(iii) increased costs of production(iv) an increase in demand for the product

• a. (iii) only

• b. (iii) and (iv)

• c. (i), (iii), and (iv)

• d. (i), (ii), (iii), and (iv)