Quiz on Measuring the Cost of Living

What is the primary purpose of the consumer price index (CPI)?

• To track changes in the stock market

• To measure the overall cost of goods and services bought by a typical consumer

• To assess the level of unemployment in the economy

• To monitor changes in the level of real GDP over time

Which of the following statements about inflation is correct?

• Inflation occurs when the overall price level is falling

• The inflation rate is calculated using only the GDP deflator

• The inflation rate is the absolute change in the price level from the previous period

• Economists use the term inflation to describe a situation in which the economy's overall price level is rising

What does the Bureau of Labor Statistics do to determine which prices are most important to the typical consumer?

• It surveys consumers

• It uses historical price data

• It analyzes production costs

• It surveys sellers of goods and services

If the CPI today is 120 and the CPI five years ago was 80, what would something that cost $1 five years ago cost in today's prices?

• $1.20

• $1.50

• $1.60

• $1.75

What is substitution bias in the context of the CPI?

• It refers to the CPI's inability to account for new goods

• It is the difference between nominal and real interest rates

• It occurs when consumers substitute toward goods that have become relatively less expensive

• It describes the effect of quality changes on the CPI

What problem in the construction of the CPI is most relevant when the prices of dairy products rise relatively less than prices in general?

• introduction of new goods

• substitution bias

• income bias

• unmeasured quality change

If the quality of a good improves while its price remains the same, what happens to the purchasing power of the dollar?

• it rises, so the CPI overstates the change in the cost of living

• it rises, so the CPI understates the change in the cost of living

• it falls, so the CPI understates the change in the cost of living

• it remains the same, so the CPI is unaffected

Which of the following statements about the introduction of new goods is correct?

• it increases the cost of maintaining the same level of economic well-being

• it may increase or decrease the cost depending on the price of the new good

• it decreases the cost of maintaining the same level of economic well-being

• it has no impact on the cost of maintaining the same level of economic well-being

What is the effect of not accounting for consumer substitution in the CPI?

• it underestimates the cost of living

• it may either overstate or understate the cost of living

• it has no effect on the cost of living

• it overestimates the cost of living

If the price of gasoline increases rapidly and consumers buy less gasoline, how does the CPI respond?

• it understates the price increase due to substitution bias

• it overstates the price increase due to substitution bias

• it reflects the price increase accurately

• it overstates the price increase due to income bias