Chapter11e

How are the weights on the various goods and services in the CPI basket determined?

• All goods and services are weighted equally.
• A survey is conducted to determine how much of each good and service typical consumers purchase.
• the weights equal the ratio of expenditures on each good or service divided by the total consumption expenditures in the GDP accounts.
• Each good and service is weighted according to its price.

For the CPI, the base year is

• the benchmark against which other years are compared, and it changes each year.
• the benchmark against which other years are compared, and it changes occasionally.
• the year the CPI first appeared.
• always 1989.

The inflation rate is calculated

• from a survey of consumer spending.
• by adding up the price increases of all goods and services.
• by computing a simple average of the price increase in all goods and services.
• by determining the percentage increase in the price index from the preceding period.

The producer price index measures the cost of a basket of goods and services

• typical of those produced in the economy.
• produced for a typical consumer.
• sold by producers.
• bought by firms.

The goal of the consumer price index is to measure changes in the

• costs of production
• cost of living.
• relative prices of consumer goods.
• production of consumer goods.

Suppose the price of a quart of milk rises from $1 to $1.25 and the price of a T-shirt rises from $8 to $10. If the CPI rises from 150 to 175 people will likely buy

• more milk and more T-shirts.
• more milk and fewer T-shirts.
• less milk and more T-shirts.
• less milk and fewer T-shirts.

Which change in the price index shows the greatest rate of inflation: 100 to 110, 150 to 165, or 180 to 198?

• 100 to 110
• 150 to 165
• 180 to 198
• All changes show the same rate of inflation.

When the quality of a good improves the purchasing power of the dollar

• increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
• increases, so the CPI understates the change in the cost of living if the quality change is not accounted for.
• decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
• decreases, so the CPI understates the change in the cost of living if the quality change is not accounted for.

If the prices of Australian-made shoes imported into the United States increase,

• both the GDP deflator and the consumer price index will increase.
• neither the GDP deflator nor the consumer price index will increase.
• the GDP deflator will increase but the consumer price index will not increase.
• the consumer price index will increase, but the GDP deflator will not increase.

In general, if a consumer good is produced domestically and consumed domestically, a reduction in its price will have which of the following effects?

• The consumer price index will decrease relatively more than the GDP deflator will.
• The consumer price index and the GDP deflator will decrease by the same amount.
• The consumer price index will decrease relatively less than the GDP deflator will.
• One cannot generalize about the relative decrease in the two price indices.