CH 9: Inflation

Question 1

1. Babe Ruth, the famous baseball player,
   earned $80,000 in 1931. Today, the best
   baseball players can earn more than 400 times as
   much as Babe Ruth earned in 1931. However,
   prices have also risen since 1931. We can
   conclude that
   a. the best baseball players today are
   about 400 times better off than Babe
   Ruth was in 1931.
   b. because prices have also risen, the
   standard of living of baseball stars
   hasn’t changed since 1931.
   c. one cannot make judgments about
   changes in the standard of living based
   on changes in prices and changes in
   incomes.
   d. one cannot determine whether baseball
   stars today enjoy a higher standard of
   living than Babe Ruth did in 1931
   without additional information
   regarding increases in prices since
   1931.

Answer 1

D. one cannot determine whether baseball
stars today enjoy a higher standard of
living than Babe Ruth did in 1931
without additional information
regarding increases in prices since
1931.

Question 2

2. The consumer price index is used to
   a. monitor changes in the level of
   wholesale prices in the economy.
   b. monitor changes in the cost of living
   over time.
   c. monitor changes in the level of real
   GDP over time.
   d. monitor changes in the stock market.

Answer 2

B. monitor changes in the cost of living
over time.

Question 3

3. The consumer price index is used to
   a. convert nominal GDP into real GDP.
   b. turn dollar figures into meaningful
   measures of purchasing power.
   c. characterize the types of goods and
   services that consumers purchase.
   d. measure the quantity of goods and
   services that the economy produces.

Answer 3

B. turn dollar figures into meaningful
measures of purchasing power.

Question 4

4. When the consumer price index rises, the
   typical family
   a. has to spend more dollars to maintain
   the same standard of living.
   b. can spend fewer dollars to maintain the
   same standard of living.
   c. finds that its standard of living is not
   affected.
   d. can offset the effects of rising prices
   by saving more.

Answer 4

A. has to spend more dollars to maintain
the same standard of living.

Question 5

5. Economists use the term inflation to describe
   a situation in which
   a. some prices are rising faster than
   others.
   b. the economy’s overall price level is
   rising.
   c. the economy’s overall price level is
   high, but not necessarily rising.
   d. the economy’s overall output of goods
   and services is rising faster than the
   economy’s overall price level.

Answer 5

B. the economy’s overall price level is
rising.

Question 6

6. The economy’s inflation rate is the
   a. price level in the current period.
   b. change in the price level from the
   previous period.
   c. change in the gross domestic product
   from the previous period.
   d. percentage change in the price level
   from the previous period.

Answer 6

D. percentage change in the price level
from the previous period.

Question 7

7. Which of the following is correct?
   a. The GDP deflator is better than the
   CPI at reflecting the goods and
   services bought by consumers.
   b. The CPI is better than the GDP
   deflator at reflecting the goods and
   services bought by consumers.
   c. The GDP deflator and the CPI are
   equally good at reflecting the goods
   and services bought by consumers.
   d. The GDP deflator is more commonly
   used as a gauge of inflation than the
   CPI is.

Answer 7

B. The CPI is better than the GDP
deflator at reflecting the goods and
services bought by consumers.

Question 8

8. When computing the cost of the basket of
   goods and services purchased by a typical
   consumer, which of the following changes from
   year to year?
   a. the quantities of the goods and services
   purchased
   b. the prices of the goods and services
   c. the goods and services making up the
   basket
   d. All of the above are correct.

Answer 8

B. the prices of the goods and services

Question 9

9. In computing the consumer price index, a
   base year is chosen. Which of the following
   statements about the base year is correct?
   a. The base year is always the first year
   among the years for which
   computations are being made.
   b. It is necessary to designate a base year
   only in the simplest case of two goods;
   in more realistic cases, it is not
   necessary to designate a base year.
   c. The value of the consumer price index
   is always 100 in the base year.
   d. The base year is always the year in
   which the cost of the basket was
   highest among the years for which
   computations are being made.

Answer 9

C. The value of the consumer price index
is always 100 in the base year.

Question 10

10. The inflation rate is calculated
    a. by determining the change in the price
    index from the preceding period.
    b. by adding up the price increases of all
    goods and services.
    c. by computing a simple average of the
    price increases for all goods and
    services.
    d. by determining the percentage increase
    in the price index from the preceding
    period.

Answer 10

D. by determining the percentage increase
in the price index from the preceding
period.