TA of Macroeconomics - Đức Thành

Chap 11: Measuring the Cost of Living

1. The statistic used to convert dollar amounts into meaningful measures of purchasing
power is called:
a. The GDP deflator.
b. The wholesale price index.
c. The consumer price index.
d. The producer price index.
2. The first step in measuring the CPI is to:
a. select the market basket.
b. conduct a monthly survey.
c. collect prices for the basket of goods and services.
d. interview businesses.
3. To fix the basket for the CPI, the Bureau of Labor Statistics:
a. Sets up a committee that decides, based on its own experience, what items will
be in the basket.
b. Reviews the things produced in our economy and selects some of these to
include in the basket.
c. Reviews national expenditure patterns in the economy, and selects a basket
that reflects these patterns.
d. Surveys a large number of consumers to find what they buy, then fixes a
basket based on its findings.
4. Suppose the cost of the basket in 2005 was $3,300, and the cost of the basket in the
base year was $3,000. Find the CPI for 2005.
a. 10.
b. 909.
c. 110.
d. 11.
5. An important difference between the GDP deflator and the CPI is that
a. The GDP deflator reflects the prices of all goods and services produced
domestically, whereas the CPI reflects the prices of goods and services bought
by consumers.
b. The GDP deflator reflects the prices of goods and services bought by
producers, whereas the CPI reflects the prices of goods and services bought by
consumers.
c. The GDP deflator reflects the prices of all goods and services produced by a
nation’s resources, whereas the CPI reflects the prices of goods and services
bought by consumers.
d. The GDP deflator reflects the prices of goods and services bought by
producers and consumers, whereas the CPI reflects the prices of goods and
services bought by consumers.
6. Mr. Trung bought a house in 2018. He obtains a mortgage that carries an annual
interest rate of 12 per cent, and makes payments of $880 per month. The CPI in 2018
 TA of Macroeconomics - Đức Thành

was 100, in 2019 it was 110, and in 2020 it was 120. What is the inflation rate in
2019?
a. 120 percent
b. 20 percent.
c. 10 percent.
d. 9 percent.

7. What is the basket of goods used to construct the CPI?

a. A random sample of all goods and services produced in the economy.
b. The goods and services determined by the American Medical Association to
be most healthy.
c. The goods and services typically bought by consumers, according to Bureau of
Labor Statistics surveys.
d. The least expensive goods and services in each major category of consumer
expenditures.

8. By far the largest category of goods and services in the CPI basket is:
a. Food and beverages.
b. Transportation.
c. Housing.
d. Recreation.

9. Inflation Rate:
a. Measures how fast the purchasing power of money rises over time
b. Real interest rate = nominal interest rate – inflation rate
c. Percentage change in the price level from one period to another
d. Measure of the overall cost of goods services bought by a typical consumer.

10. Categories of U.S. consumer spending, ranked from largest to smallest are:
a. food and beverages, housing, transportation, and medical care.
b. housing, transportation, food and beverages, and medical care.
c. medical care, housing, food and beverages, and transportation.
d. housing, food and beverages, transportation, and medical care.

11. In the CPI, the base year is

a. The benchmark against which other years are compared, updated each year.
b. The benchmark against which other years are compared.
c. A particularly bad year for consumer prices.
d. Always 1989.

12. Suppose that the residents of Fashionland spend all of their income on dresses, hats
and shoes. In 2010, they bought four dresses for $800, five hats for $500 and two
pairs of shoes for $400. In 2011 they bought five dresses for $900, five hats for $600
and four pairs of shoes for $600. If the base year is 2010, what is the CPI in 2010 &
2011?
 TA of Macroeconomics - Đức Thành

a. 100 & 110.

b. 100 & 95.
c. 95 & 110.
d. 100 & 120.

13. Suppose that the residents of Fashionland spend all of their income on dresses, hats
and shoes. In 2010, they bought four dresses for $800, five hats for $500 and two
pairs of shoes for $400. In 2011 they bought five dresses for $900, five hats for $600
and four pairs of shoes for $600. If the base year is 2010, what is the inflation rate in
2011?
a. -5 percent.
b. -3 percent.
c. -2 percent.
d. 2 percent.

14. If the cost of transportation and the cost of food and beverages increase by 30 percent,
the CPI is likely to increase by
a. About 30 percent.
b. About 10 percent.
c. About 3 percent.
d. About 33 percent.

15. The substitution bias in the CPI results from the index not taking into account:
a. The substitution of new goods for old goods in the purchases of consumers
b. That consumers substitute towards goods that have become relatively less
expensive
c. The substitution of new prices for old prices in the basket of goods from one
year to the next
d. The substitution of quality for quantity in consumer purchases over time

16. Which of the problems in the construction of the CPI is best represented by the
invention of pocket-sized computers?
a. Substitution bias.
b. Introduction of new goods.
c. Unmeasured quality change.
d. None of the above

17. Arturo bought a hand calculator in 2010 for $200. By 2020, the same calculator sells
for $1, and Arturo buys several. What problem in the construction of the CPI does this
situation best illustrate?
a. Introduction of new goods.
b. Substitution bias.
c. Unmeasured quality change.
d. None of the above.
 TA of Macroeconomics - Đức Thành

18. Laura bought word processing software in 2019 for $50. Laura’s twin brother
Laurence buys an upgrade of the same software in 2020 for $50. What problem in the
construction of the CPI does this situation best represent?
a. Introduction of new goods.
b. Substitution bias.
c. Unmeasured quality change.
d. None of the above.
e.
19. In 1984, Allen bought a new stereo system at the Modern technology Hi-Fi store. He
is told by the salesman that Mr Steve Jobs Bose has invented a computer that allows
you to do complex calculations and word processing in your home. Allen buys an
Apple Mac. This purchase illustrates which of the following problems in the CPI’s
construction?
a. Substitution bias.
b. Introduction of new goods.
c. Unmeasured quality change.
d. Both B and C.

20. Because the CPI is based on a fixed basket of goods, substitution bias causes the
index to
a. Overstate the increase in the cost of living from one year to the next.
b. Ignore any increase in the cost of living from one year to the next.
c. Understate the increase in the cost of living from one year to the next.
d. Sometimes understate, and sometimes overstate the increase in the cost of
living from one year to the next.

21. The first step in measuring the CPI is to

a. interview businesses.
b. conduct a monthly survey.
c. select the market basket.
d. collect prices for the basket of goods and services.

22. If the prices of Australian-made shoes imported into the United States increase, then,
as a result,
a. Both the GDP deflator and the consumer price index increase.
b. Neither the GDP deflator nor the consumer price index increases.
c. The GDP deflator increases but the consumer price index does not increase.
d. The consumer price index will increase, but the GDP deflator will not
increase.

23. In the United States, if the price of imported oil rises,

a. The GDP deflator rises much more than does the consumer price index.
b. The consumer price index rises much more than does the GDP deflator.
 TA of Macroeconomics - Đức Thành

c. The GDP deflator and the consumer price index rise by about the same
amount.
d. The consumer price index rises slightly more than does the GDP deflator.

24. How does a rise in the consumer price index affect a typical family?
a. The typical family has to spend more dollars to maintain the same standard of
living.
b. The typical family can spend fewer dollars to maintain the same standard of
living.
c. The typical family finds that its standard of living is not affected.
d. The typical family can offset the effects of rising prices by saving more.

25. An increase in the price of domestically produced industrial robots will be reflected in
a. Both the GDP deflator and the consumer price index.
b. Neither the GDP deflator nor the consumer price index.
c. The GDP deflator but not in the consumer price index.
d. The consumer price index but not in the GDP deflator.
26. What is the meaningful measure of purchasing power used to convert VND amounts?
a. Consumption price index.
b. Producer price index.
c. Consumer price index.
d. The GDP deflator.

27. Which of the following statements is the best described for the inflation rate?
a. It is a rate which must be paid for borrowing a certain amount of money.
b. The inflation rate is the cost of inflation.
c. The percentage change in output from the previous period.
d. The percentage change in price level from the previous period.

28. Suppose the price of a gallon of ice cream rises from $4 to $5 and the price of coffee
rises from $2 to $2.50. If the CPI rises from 150 to 200 people will likely buy
a. more ice cream and more coffee.
b. more ice cream and less coffee.
c. less ice cream and more coffee.
d. less ice cream and less coffee.

29. If the CPI increases from 2021 to 2022, the economy will experience
a. Deflation.
b. Stagnation.
c. Inflation.
d. Growth

30. If the prices of Vinfast automobile increasing cause the CPI to rise by 2 percent,
a. The GDP deflator will likely increase by more than 2 percent.
 TA of Macroeconomics - Đức Thành

b. The GDP deflator will likely increase by 2 percent.

c. The GDP deflator will likely increase by less than 2 percent.
d. The GPD deflator will likely decrease by 2 percent.

31. Which of the following statements is most true about CPI and GDP.
a. Generally move together.
b. They both always show identical changes.
c. They both always have different patterns of movement.
d. They both generally show different patterns of movement.

32. An IU teacher’s 2005 salary was $8,000. The price index for 2005 is 15.2 and the
price index for 2021 is 166. An IU teacher’s 2005 salary was equivalent to a 2021
salary of
a. About $87,368.
b. About $8,736.
c. About $7,325.
d. None of the above.

33 – 36: The next four questions are based on the following information:

Koi earns $3,000 from his business in 2003. In 2018, Koi’s grandson earns $30,000 from the
same business. The price index for 2003 is 10, and the price index for 2018 is 150.
33. What is Koi’s income in 2018 dollars?
a. $3,000
b. $30,000
c. $45,000
d. $2,000

34. What is Koi’s grandson’s income in 2003 dollars?

a. $2,000
b. $3,000
c. $45,000
d. $30,000

35. What was the ratio of real income of Koi’s grandson to Koi’s real income?
a. 10:1
b. 15:1
c. 2:3
d. None of them above

36. Between 2003 and 2018, the purchasing power of Koi’s salary has
a. Increased
b. Decreased
c. Remained unchanged
 TA of Macroeconomics - Đức Thành

d. It is impossible to tell from the information given

37. Which of the following means that the CPI overstates the actual inflation rate?
a. New goods bias.
b. Quality change bias.
c. Outlet substitution bias.
d. All of the above cause the CPI to overstate inflation

38. Economists use the term inflation to describe a situation in which

a. the economy's overall output of goods and services is rising faster than the
economy's overall price level.
b. some prices are rising faster than others.
c. the economy's overall price level is high, but not necessarily rising.
d. the economy's overall price level is rising.

39. What basket of goods is used to construct the CPI?

a. The least expensive and the most expensive goods and services in each major
category of consumer expenditures.
b. A random sample of all goods and services produced in the economy.
c. The goods and services that are typically bought by consumers as determined
by government surveys.
d. Only food, clothing, transportation, entertainment, and education.

40. In the CPI, goods and services are weighted according to

a. how long a market has existed for each good or service.
b. the number of firms that produce and sell each good or service.
c. how much consumers buy of each good or service.
d. the extent to which each good or service is regarded by the government as a
necessity.

41. Linh himself plans to travel to the US which is now worth $30,000. Supposed that the
cost of living in Vietnam where he works in the next many years will be 63 and his
salary remains unchanged. How long does it take him to save enough money?
a. 1 year and 8 months.
b. 1 year and 9 months.
c. 1 year and 7 months.
d. None of the above.

42. What is the nominal rate?

a. It is the interest rate paid or charged by Vietcombank.
b. It is a low interest rate used by various firms to boost sales.
c. The interest rate corrected for the rate of deflation.
d. All of the above.
 TA of Macroeconomics - Đức Thành

43. The real interest rate is

a. The interest rate paid or charged by Đông Á Bank.
b. The interest rate corrected for the rate of inflation.
c. A high interest rate used by various firms to boost sales.
d. All of the above.

44. If the nominal interest rate is 8% and rate of inflation is 3%, the real interest rate is
a. 11%
b. 24%
c. 5%
d. 3,75%

45. The nominal rate and real interest rate tell you
a. The growth of money in your bank account overtime and the number of
money in your bank account, respectively.
b. The growth of money in your bank account overtime and how fast the
purchasing power of your bank account rises over time, respectively.
c. How fast the purchasing power of your bank account rises overtime and the
money in your bank account, respectively.
d. How fast the purchasing power of your bank account rises overtime and the
growth of money in your bank account overtime, respectively.

46. What is the relationship between nominal rate and real interest rate?
a. They both move together.
b. They never move together.
c. They often do not move together.
d. They are identical.

47 – 50: The next four questions are based on the following information:

At the beginning of the year, Koi goes to Techcombank, a well-known commercial bank in
Vietnam to deposit $1,000 with the interest of 5%. Inflation for the year is 10%.

47. At the end of the year, Koi’s $1,000 deposit has earned.
a. $1050
b. $50
c. $100
d. -$50

48. At the end of the year, the purchasing power of Koi’s $1,000 deposit has changed by
a. $1050
b. $50
c. $100
d. -$50
 TA of Macroeconomics - Đức Thành

49. Which is the most correct statement about the relationship between the change in the
number of dollars in Koi’s saving account and the change in the purchasing power of
Koi’s saving account?
a. The purchasing power of Koi’s account has increased more than the number of
dollars in the account.
b. The purchasing power of Koi’s account and the number of dollars in the
account have changed by the same amount.
c. The number of dollars in Koi’s account has increased more than the
purchasing power of the account.
d. None of the above are correct statements.

50. Which of the following is the most accurate statement about real and nominal interest
rates.
a. Real interest rates and nominal interest rates must be positive can be either
positive or negative.
b. Real interest rates must be positive, but nominal interest rates can be either
positive or negative.
c. Real interest rates can be either positive or negative, but nominal interest rates
must be positive.
d. Real interest rates and nominal interest rates must be positive