1 Economics(201(Spring(2011(Review(Questions(for(Exam(3(Ȃ(KEY(( CONSUMER PRICE INDEX - CPI 1. Which government organization is in charge of calculating and reporting the consumer price index? a) Ministry of Truth and Information b) Bureau of Commerce and Statistics c) Bureau of Labor Statistics d) Bureau of Economic Analysis e) Bureau of Consumer Information 2. What are the two main measures of inflation used in the U.S.? a) The Consumer Price Index and the GDP deflator b) Real Interest Rate and the Producer Interest rate c) The Producer Price Index and real GDP d) The Retailer Price Index and the GDP Index e) The Nominal Price Index and the Real Price Index 3. An important difference between the GDP deflator and the CPI is that the GDP deflator reflects price changes of ____, while the CPI reflects price changes of ____. a) goods/services purchased by producers; goods/services purchased by consumers b) goods/services purchased by consumers; goods/services purchased by producers c) goods/services purchased by consumers; goods/services purchased by consumers and producers d) goods/services produced domestically; goods/services produced by foreign countries e) goods/services produced domestically; goods/services purchased by consumers2 4. If the price of a used good that is typically purchased by American households increases, how does this affect the CPI and the GDP deflator? a) both the CPI and the GDP deflator would rise b) the CPI would rise, but the GDP deflator would be unaffected c) the CPI would be unaffected, while the GDP deflator would rise d) the CPI would rise while the GDP deflator would fall e) both the CPI and the GDP deflator would fall 5. Consider a good that is produced domestically and purchased by typical households. If the price of the good rises, how would this affect the CPI and/or the GDP deflator? a) the CPI would rise, but the GDP deflator would be unaffected b) the CPI would remain unaffected, but the GDP deflator would rise c) both the CPI and the GDP deflator would rise d) the CPI would fall while the GDP deflator would rise e) neither the CPI nor the GDP deflator would be affected 6. Consider a good produced domestically and purchased by firms, used as an input in the production of goods sold to households. If the price of this input were to rise, how would this immediately affect the CPI and/or the GDP deflator? a) the CPI would be unaffected while the GDP deflator would rise b) the CPI would rise while the GDP deflator would be unaffected c) both the CPI and the GDP deflator would rise d) the CPI would fall while the GDP deflator would be unaffected e) Neither the CPI nor the GDP deflator would be affected3 The following table contains information about prices of goods contained in a market basket. The market basket consists of 10 bags of snack food (Pork Rinds) and 20 bottles of Rogaine. Let the base year be 2000. Use this information to answer the next several questions. Year Price (pork rinds) Price (Rogaine) Cost of Basket CPI Inflation 1999 $3 $44 2000 $4 $45 2001 $5 $50 2002 $6 $50 7. What is the cost of the market basket in 2000? a) $180 b) $910 c) $940 d) $1,050 e) $1,060 8. What is the cost of the market basket in 2001? a) $250 b) $910 c) $940 d) $1,050 e) $1,060 9. What is the cost of the market basket in 2002? a) $300 b) $910 c) $940 d) $1,050 e) $1,0604 10. Using 2000 as the base year, what are the values of the CPI in 1999, 2000, 2001 and 2002? a) 100, 103.3, 115.4, 116.5 b) 96.8, 100, 111.7, 112.8 c) 96.8, 99.0, 100.7, 111.7 d) 100, 105.4, 111.7, 115.4 e) 96.8, 100, 103.3, 111.7 11. What was the rate of inflation from 1999 to 2000? a) 0% b) 1.0% c) 2.3% d) 3.3% e) 5.8% 12. What was the rate of inflation from 2000 to 2001? a) 1.0% b) 3.3% c) 5.8% d) 11.7% e) 15.2% 13. What was the rate of inflation from 2001 to 2002? a) 0% b) 1.0% c) 2.3% d) 3.3% e) 5.8%5 Hoorah! In 2012, after graduation, you land your first professional job as a law clerk, running errands, making copies and getting coffee for the higher ups. Your salary is $35,000 per year. By the year 2040 you have made senior partner in the law firm, earning an annual salary of $100,000. The CPI in 2012 is 210. The CPI in year 2040 is 650. Use that information to answer the next few questions. 14. Expressed in 2040 dollars, what is your salary in 2012? a) $11,308 b) $32,308 c) $35,000 d) $100,000 e) $108,333 15. Expressed in 2012 dollars, what is your salary in 2040? a) $32,308 b) $35,000 c) $100,000 d) $108,333 e) $309,524 16. In terms of purchasing power, when were you better off? a) 2012 b) 2040 c) it was the same in both years d) unable to determine 17. What happened to your purchasing power from 2012 to 2040? a) your purchasing power decreased over time b) your purchasing power increased over time c) your purchasing power stayed the same d) unable to determine6 Suppose that the inflation rate, as calculated by the CPI, is reported to be 5% from year 1 to year 2. Use that information to answer the next two questions. 18. In theory, what does this information mean? a) The price of all goods produced domestically has increased by 5%. b) The price of all goods purchased by consumers has increased by 5%. c) The price of used goods and imports has increased by 5%. d) The purchasing power of the dollar has fallen by 5%. e) Real GDP rose by 5%. 19. It is generally agreed that because of the way that the CPI is constructed, it may ³RYHUVWDWH´ WKH WUXH HIIHFWV RI LQIODWLRQ :KDW GRHV WKLV PHDQ" a) In actuality, the purchasing power of the dollar probably fell by slightly less than 5%. b) In actuality, the purchasing power of the dollar probably fell by slightly more than 5%. c) In actuality, the price of all goods purchased by consumers has risen by slightly more than 5%. d) In actuality, the price of all goods produced domestically has risen by slightly more than 5%. e) In actuality, real GDP rose by slightly less than 5%. UNEMPLOYMENT 20. :KLFK JRYHUQPHQW DJHQF\ LV LQ FKDUJH RI FDOFXODWLQJ DQG UHSRUWLQJ WKH QDWLRQ¶V unemployment figures? a) Bureau of Labor Statistics b) Bureau of Employment c) Ministry of Truth and