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Chapter 23
Measuring the Cost of Living
34
Economics
Undergraduate 2
02/08/2010

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Term
An increase in the price of imported cameras is captured by the CPI but not by the GDP deflator.
Definition
False
Term
An increase in the price of helicopters puchased by the U.S> military is captured by the CPI
Definition
False
Term
Because an increase in gasoline prices causes consumers to ride their bikes more and drive their cars less, the CPI tends to underestimate the cost of living.
Definition
False
Term
The "base yeart" in a price index is the benchmark year against which other years are compared.
Definition
True
Term
If the CPI rises at 5 percent per year, then every individual in the country needs exactly a 5 percent increase in their income for their standard of living to remain constant
Definition
True
Term
The producer price index (PPI) is constructed to measure athe change in price of total production.
Definition
True
Term
If the Bureau of Labor Statistics fails to recognize that recently poduced automobiles can be driven for many more miles than older models, then the CPI tends to overestimate the cost of living.
Definition
True
Term
If your wage rises from $55 to $6.25 while the CPI rises from 112 to 121, you should feel an increase in your standard of living
Definition
True
Term
The largest category of goods and services in the CPI is medical care.
Definition
False
Term
It is impossible for real interest rates to be negative.
Definition
False
Term
If the nominal interestr rate is 12 percent and the rate of inflation is 7 percent, then the real reate of interest is 5 percent
Definition
True
Term
If lenders demand a real rate of return of 4 percent and they expect infaltion to be 5 percent, then they should charge 9 percent intrest when they extend loans.
Definition
True
Term
If borrowers and lenders agree on a nominal interest rate and inflation turns out to be greater than they had anticipated, lenders will gain at the expense of borrowers.
Definition
False
Term
If workers and firms agree on an increase in wages based on their expectations of inflation and inflation turns out to be less than they expected, workers will gain at the expense of firms.
Definition
True
Term
Inflation can be measured by all of the following except the...
Definition
finished goods price index
Term
The CPI will be most influenced by a 10 percent increase in the price of which of the following consumption categories?
Definition
Food and Beverages
Term
In 1989, the CPI was 124. In 1990, it was 130.7. What was the rate of inflation?
Definition
5.4 percent
Term
Which of the following would likely cause the CPI to rise more than the GDP deflator?
Definition
an increase in the price of Hondas produced in Japan and sold in the United States
Term
The "basket" on which the CPI is based is composed of...
Definition
products purchased by the typical consumer
Term
If there is an increase in the price of apples that causes consumers to puchase fewer pounds of apples and more pounds of oranges, the CPI will suffer from...
Definition
substitution bias
Term
What is the value of the basket in the base year? (beef/pork)
Definition
$300
Term
What are the values of the CPI in 2003, 2004, and 2005 respectively? (beef/pork)
Definition
100, 113.3, 125
Term
What is the inflation rate for 2004? (beef/pork)
Definition
13.3 percent
Term
What is the inflation rate for 2005? (beef/pork)
Definition
None of the above (25%)
Term
The table shows that the 2004 inflation rate is biased upward because of... (beef/pork)
Definition
substitution bias
Term
Suppose the base year is changed in the table from 2003 to 2005. Also, suppose that the typical consumption basket was now determined in 2005 (now use the 2005 consumption basket) What is the new value of the CPI in 2004?
Definition
90.6
Term
Suppose your income rises from $19000 to $31000 while the CPI rises from 122 to 169. Your standard of living has likely...
Definition
risen
Term
If the nominal interest rate is 7 percent and the inflation rate is 3 percent, then the real intrest rate is...
Definition
4 Percent
Term
Which of the following statements is correct?
Definition
The real interest rate is the nominal interest rate minus the inflation rate
Term
If inflation is 8 percent and the real interest rate is 3 percent, then the nominal interest rate should be...
Definition
11 percent
Term
Under which of the following conditions would you prefer to be the lender?
Definition
The nominal rate of interest is 5 percent and the inflation rate is 1 percent
Term
Under which of the following conditkions would you prefer to be the borrower?
Definition
The nominal rate of interest is 20 percent and the inflation rate is 25 percent
Term
If borrowers and lenders agree on a niminal interest rate and inflation turns out to be less than they had expected..
Definition
lenders will gain at the expense of borrowers
Term
If workers and firms agree on an increase in wages based on their expectations of inflation and inflation turns out to be more than they expected...
Definition
firms will gain at the expense of workers
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