ECO 205 - Quiz 02

1.What is the base year in the context of CPI?

• • A. The year when inflation was zero

• B. The first year of a country's independence

• • D. The year with the highest GDP growth

• • D. The year used as a benchmark for price comparison

2.Which of the following is NOT included in the CPI basket?

• • A. Housing costs

• • B. Food and beverages

• • C. Military equipment

• • D. Transportation costs

3.What is the main difference between CPI and the GDP deflator?

• • A. CPI includes only domestic products; GDP deflator includes imports.

• • B. CPI reflects consumer purchases; GDP deflator reflects all goods and services produced domestically.

• • C. GDP deflator measures urban areas only; CPI measures rural areas.

• • D. CPI accounts for capital goods; GDP deflator does not.

4. How does the introduction of new goods affect CPI accuracy?

• • A. It overestimates the cost of living.

• • B. It underestimates the cost of living.

• • C. It improves accuracy immediately.

• • D. It creates a downward bias.

5.If inflation rises while wages remain constant, what happens to real wages?

• A. Real wages decrease.

• B. Real wages increase.

• • C. Real wages remain unchanged.

• • D. Real wages double.

6.If the government implements a subsidy that reduces the cost of electricity for households, what is the most likely short-term effect on the CPI?

• A. CPI will increase.

• B. CPI will decrease.

• C. CPI will remain unchanged.

• D. CPI will only change if GDP also changes.

7.If the price of food rises significantly while other goods remain stable, how will this affect a consumer who spends most of their income on food?

• A. GDP deflator will rise more than CPI.

• B. Their cost of living will rise less than reflected by CPI.

• C. Their cost of living will rise more than reflected by CPI.

• D. CPI will reflect the exact rise in their cost of living.

8.If a country's CPI is rising faster than its GDP deflator, what can be inferred about price changes?

• A. Inflation is not occurring in the economy.

• • B. GDP deflator is more accurate.

• • C. Export prices are rising significantly.

• D. Consumer goods prices are rising faster than overall goods and services prices.

9.Which of the following best explains why the CPI might overstate the cost of living?

• • A. It does not include imported goods.

• • B. It does not adjust adequately for quality improvements.

• • C. It excludes government spending.

• • D. It accounts for non-market transactions.

10.Why might international comparisons of CPI inflation rates be misleading?

• • A. Different countries have identical baskets of goods.

• • B. Exchange rate fluctuations are accounted for.

• • C. Consumption patterns vary significantly across countries.

• • D. Inflation rates are measured using identical methodologies globally.