Chapter 11 Measuring the Cost of Living Multiple Choice 3

Chapter 11/Measuring the Cost of Living  317 101. Suppose that the CPI is currently 400 and was 100 in 1969. Then according to the CPI, $100 today purchases the same amount of goods and services as a. $25 in 1969. b. $40 in 1969. c. $60 in 1969. d. None of the above are correct. ANSWER: a. $25 in 1969. TYPE: M DIFFICULTY: 1 SECTION: 11.2 102. Suppose that the CPI is currently 200 and was 40 in 1950. Then according to the CPI, $1 in 1950 purchased the same number of goods and services as a. $5 today. b. $4 today. c. $3 today. d. None of the above is correct. ANSWER: a. $5 today. TYPE: M DIFFICULTY: 1 SECTION: 11.2 103. You know that a candy bar cost five cents in 1962. You also know the CPI for 1962 and the CPI for today. Which of the following would you use to compute the price of the candy bar in today’s prices? a. five cents  (1962 CPI/ today’s CPI) b. five cents  (1962 CPI/(today’s CPI – 1962 CPI)) c. five cents  (today’s CPI/1962 CPI) d. five cents  today’s CPI – five cents x 1962 CPI. ANSWER: c. five cents  (today’s CPI/1962 CPI) TYPE: M DIFFICULTY: 1 SECTION: 11.2 104. You know that a candy bar cost sixty cents today. You also know the CPI for 1962 and the CPI for today. Which of the following would you use to compute the price of the candy bar in 1962 prices? a. sixty cents  (todays CPI – 1962 CPI) b. sixty cents  (1962 CPI – today’s CPI) c. sixty cents  (todays CPI/1962 CPI) d. sixty cents  (1962 CPI/todays CPI) ANSWER: d. sixty cents  (1962 CPI/todays CPI) TYPE: M DIFFICULTY: 2 SECTION: 11.2 105. The 2002 CPI was 177 and the 1982 CPI was 96.5. If your parents put aside $1,000 for you in 1982, how much would you have needed in 2002 in order to buy what you could have with the $1,000 in 1982? a. $1,834.20 b. $1,777.77 c. $1,714.81 d. None of the above are correct. ANSWER: a. $1,834.20 TYPE: M DIFFICULTY: 1 SECTION: 11.2 The next three questions are based on the following information: Grant Smith was a doctor in 1944 and made about $12,000 a year. His daughter Lisa Smith also is a doctor and last year she made about $175,000 in 2001. The price index in 1950 was 17.6 and the price index was 177 in 2001. 106. What is Grant’s income in 2001 dollars? a. $19,128 b. $21,240 c. $120,682 d. $173,600 ANSWER: c. $120,682 TYPE: TF DIFFICULTY: 1 SECTION: 11.1 318  Chapter 11/Measuring the Cost of Living 107. What is Lisa’s income in 1945 dollars? a. $15,667 b. $17,401 c. $19,322 d. None of the above are correct. ANSWER: b. $17,401 TYPE: M DIFFICULTY: 1 SECTION: 11.1 108. What was the ratio of Grant’s real income to Lisa’s real income? a. 2:15 b. 3:5 c. 7:10 d. 1:1 ANSWER: c. 7:10 TYPE: TF DIFFICULTY: 1 SECTION: 11.1 109. Ingrid takes a university teaching job as an assistant professor in 1974 at a salary of $10,000. By 2003, she has been promoted to full professor, with a salary of $50,000. If the price index in 1974 is 50, and the price index in 2003 is 180, what is Ingrid’s 2003 salary in 1974 dollars? a. $13,889 b. $18,000 c. $26,000 d. $36,000 ANSWER: a. $13,889 TYPE: TF DIFFICULTY: 2 SECTION: 11.1 110. In 1970 Professor Fellswoop made $12,000, in 1980 he earned $24,000, and in 1990 he earned $36,000. If the CPI was 40 in 1970, 60 in 1980, and 100 in 1990, then in terms of today’s dollars, Professor Fellswoop’s salary was highest in a. 1970, and lowest in 1980. b. 1990, and lowest in 1980. c. 1980, and lowest in 1970. d. 1990, and lowest in 1970. ANSWER: c. 1980, and lowest in 1970. TYPE: M DIFFICULTY: 2 SECTION: 11.1 111. In 1969 Don bought a Dodge Dart for $2,500. He drove this car until 2003 when he bought a Honda Civic for $18,000. If the price index in 1969 was 36.7 and the price index in 2003 is 180, what’s the price of the Dodge Dart in 2003 prices? a. $3,583 b. $4,500 c. $9,762 d. $12,262 ANSWER: d. $12,262 TYPE: M DIFFICULTY: 1 SECTION: 11.1 112. Ethel purchased a bag of groceries in 1970 for $8. She purchased the same bag of groceries in 2003 for $25. If the price index was 38.8 and is 180 in 2003, what’s the price of a 1970 bag of groceries in 2003 prices? a. $25.00 b. $29.11 c. $37.11 d. None of the above are correct? ANSWER: c. $37.11 TYPE: M DIFFICULTY: 1 SECTION: 11.1 Chapter 11/Measuring the Cost of Living  319 113. In 1964 in Riverside, California one could buy a chili-dog and a root beer for $1.25, today the same chili dog and root beer cost $2.95. Which set of CPI’s would mean that the cost in today’s dollars was the same as in 1964? a. 60 in 1964 and 141.6 today b. 75 in 1964 and 126.4 today c. 80 in 1964 and 112 today d. None of the above are correct. ANSWER: a. 60 in 1964 and 141.6 today TYPE: M DIFFICULTY: 2 SECTION: 11.1 114. In 1972 in Riverside, Iowa one could buy a bag of chips, a pound of hamburger, a package of buns, and a small bag of charcoal for about $2.50. If the same goods today cost about $6.00, which set of CPI’s would make the cost in today’s dollars the same for both years? a. 60 in 1972 and 150 today b. 65 in 1972 and 156 today c. 90 in 1972 and 145.8 today d. None of the above are correct. ANSWER: b. 65 in 1972 and 156 today TYPE: M DIFFICULTY: 2 SECTION: 11.1 115. In 1972 in Riverside, Iowa one could buy model rocket engines for $1.50, if those same engines cost $2.50 today what set of CPI’s would make the engine prices in today’s dollars the same for both years? a. 60 in 1972 and 100 today b. 60 in 1972 and 120 today c. 60 in 1972 and 150 today d. None of the above are correct. ANSWER: a. 60 in 1972 and 100 today TYPE: M DIFFICULTY: 2 SECTION: 11.1 116. In 1949 Sycamore, Illinois built a hospital for about $500,000. In 1987 the county restored the courthouse for about $2.4 million. A price index for nonresidential construction was 14 in 1949, 92 in 1987, and 114.5 in 2000. According to these numbers the hospital cost about a. $3.6 million in 2000 dollars, which is less than the cost of the courthouse restoration in 2000 dollars. b. $3.6 million in 2000 dollars, which is more than the cost of the courthouse restoration in 2000 dollars. c. $4.1 million in 2000 dollars, which is less than the cost of the courthouse restoration in 2000 dollars. d. $4.1 million in 2000 dollars, which is more than the cost of the courthouse restoration in 2000 dollars. ANSWER: d. $4.1 million in 2000 dollars, which is more than the cost of the courthouse restoration in 2000 dollars. TYPE: M DIFFICULTY: 2 SECTION: 11.1 117. Andrew is offered a job in Des Moines where the CPI is 80 and a job in New York where the CPI is 125. Andrew’s job offer in Des Moines is for $42,000. How much does the New York job need to pay in order to make the two salaries have almost the same purchasing power? a. $74,667 b. $65,625 c. $60,900 d. $52,500 ANSWER: b. $65,625 TYPE: M DIFFICULTY: 2 SECTION: 11.1 118. Leslie is offered a job in Seattle that pays $50,000. She is also offered a job in Boston that pays $60,000. Which set of CPI’s below would make the two salaries have almost the same purchasing power? a. 83.3 in Seattle and 100 in Boston b. 89.3 in Seattle and 100 in Boston c. 100 in Seattle and 124.5 in Boston d. 100 in Seattle and 140 in Boston ANSWER: a. 83.3 in Seattle and 100 in Boston TYPE: M DIFFICULTY: 2 SECTION: 11.1 320  Chapter 11/Measuring the Cost of Living 119. Tiffany is offered a Job in Minneapolis that pays $80,000. She is offered a similar job in Memphis for $64,000. Which set of CPI’s would make the two salaries have almost the same purchasing power? a. 90 in Minneapolis and 80 in Memphis b. 90 in Minneapolis and 72 in Memphis c. 90 in Minneapolis and 66 in Memphis d. None of the above are correct. ANSWER: b. 90 in Minneapolis and 72 in Memphis TYPE: M DIFFICULTY: 2 SECTION: 11.1 120. When box office receipts are corrected for inflation, the No. 1 movie of all time is a. Star Wars: The Phantom Menace b. Spiderman c. Gone With the Wind d. The Sound of Music ANSWER: c. Gone With the Wind TYPE: M DIFFICULTY: 1 SECTION: 11.2 121. A COLA automatically raises the wage rate when a. GDP increases. b. the consumer price index increases. c. taxes increase. d. the consumer price index is announced. ANSWER: b. the consumer price index increases. TYPE: M DIFFICULTY: 1 SECTION: 11.2 122. Indexation refers to: a. a process of adjusting the nominal interest rate so that it is equal to the real interest rate. b. using a law or contract to automatically correct a dollar amount for the effects of inflation. c. using a price index to deflate dollar values. d. an adjustment made by the Bureau of Labor Statistics to the CPI so that the index is in line with the GDP deflator. ANSWER: b. using a law or contract to automatically correct a dollar amount for the effects of inflation. TYPE: M DIFFICULTY: 1 SECTION: 11.2 123. Mavis Corporation has an agreement with its workers to completely index the wage of its employees to inflation in the CPI. Mavis currently pays its production line workers $7.50 an hour and is scheduled to index their wages today. If the CPI is currently about 130 and was 120 a year ago Mavis should increase the hourly wages of its workers by about a. $0.075 b. $0.10 c. $0.58 d. $0.65 ANSWER: d. $0.65 TYPE: M DIFFICULTY: 2 SECTION: 11.2 124. Ruth collected Social Security payments of $220 a month in 1985. If the price index rose from 90 to 105 during 1985 her Social Security payments for 1986 should have been about a. $252.43. b. $253.00. c. $256.67. d. None of the above are correct. ANSWER: c. $256.67. TYPE: M DIFFICULTY: 2 SECTION: 11.2 Chapter 11/Measuring the Cost of Living  321 125. Social Security payments are indexed for inflation using the CPI. A recent newspaper editorial claimed that Social Security recipients are harmed by years of low inflation because they do not receive as large an increase in their payments as they do in years of high inflation. Which of the following statements is correct? a. The newspaper editorial is correct under all circumstances. b. The newspaper editorial is correct if the market basket consumed by Social Security recipients is the same as the market basket used to compute the CPI. c. The newspaper editorial is correct if the prices of the goods consumed by Social Security recipients increase faster than the prices of the goods in the market basket used to compute the CPI. d. The newspaper editorial is correct if the prices of the goods consumed by Social Security recipients increase slower than the prices of the goods in the market basket used to compute the CPI. ANSWER: c. The newspaper editorial is correct if the prices of the goods consumed by Social Security recipients increase faster than the prices of the goods in the market basket used to compute the CPI. TYPE: M DIFFICULTY: 2 SECTION: 11.1 126. Of Social Security benefits, and federal income tax brackets, which is indexed? a. both b. only Social Security benefits c. only federal income tax brackets d. Neither of them are indexed. ANSWER: a. both are indexed TYPE: M DIFFICULTY: 1 SECTION: 11.2 127. Interest represents a payment a. now for money to be transferred in the future. b. in the future for a transfer of money in the past. c. in the past for money transferred now. d. All of the above are correct. ANSWER: a. now for money to be transferred in the future. TYPE: M DIFFICULTY: 1 SECTION: 11.2 128. Which is the most accurate statement about the relationship between inflation and interest rates? a. There is no relationship between inflation and interest rates. b. The interest rate is determined by the rate of inflation. c. In order to fully understand inflation, we need to know how to correct for the effects of interest rates. d. In order to fully understand interest rates, we need to know how to correct for the effects of inflation. ANSWER: d. In order to fully understand interest rates, we need to know how to correct for the effects of inflation. TYPE: M DIFFICULTY: 1 SECTION: 11.2 129. Which of the following is the most accurate statement about the relationship between the nominal interest rate and the real interest rate? a. The real interest rate is the nominal interest rate times the rate of inflation. b. The real interest rate is the nominal interest rate minus the rate of inflation. c. The real interest rate is the nominal interest rate plus the rate of inflation. d. The real interest rate is the nominal interest rate divided by the rate of inflation. ANSWER: b. The real interest rate is the nominal interest rate minus the rate of inflation. TYPE: M DIFFICULTY: 1 SECTION: 11.2 130. If the nominal interest rate is 8 percent and rate of inflation is 3 percent, the real interest rate is a. 11 percent. b. 24 percent. c. 5 percent. d. 3.75 percent. ANSWER: c. 5 percent. TYPE: M DIFFICULTY: 1 SECTION: 11.2 322  Chapter 11/Measuring the Cost of Living 131. If the nominal interest rate is 5 percent and the rate of inflation is 10 percent, the real interest rate is a. 2 percent. b. 5 percent. c. –2 percent. d. –5 percent. ANSWER: d. –5 percent. TYPE: M DIFFICULTY: 1 SECTION: 11.2 132. If the nominal interest rate is 8 percent and rate of inflation is 2 percent, the real interest rate is a. 16 percent. b. 10 percent. c. 6 percent. d. 4 percent. ANSWER: c. 6 percent. TYPE: M DIFFICULTY: 1 SECTION: 11.2 133. The nominal interest rate tells you a. how fast the number of dollars in your bank account rises over time. b. how fast the purchasing power of your bank account rises over time. c. the number of dollars in your bank account. d. the purchasing power in your bank account. ANSWER: a. how fast the number of dollars in your bank account rises over time. TYPE: M DIFFICULTY: 1 SECTION: 11.2 134. The real interest rate tells you a. how fast the number of dollars in your bank account rises over time. b. how fast the purchasing power of your bank account rises over time. c. the number of dollars in your bank account. d. the purchasing power of your bank account. ANSWER: b. how fast the purchasing power of your bank account rises over time. TYPE: M DIFFICULTY: 1 SECTION: 11.2 135. Which of the following is the most accurate statement about nominal and real interest rates? a. Nominal and real interest rates always move together. b. Nominal and real interest rates never move together. c. Nominal and real interest rates often do not move together. d. Nominal and real interest rates are identical. ANSWER: c. Nominal and real interest rates often do not move together. TYPE: M DIFFICULTY: 1 SECTION: 11.2 136. Which of the following is the most accurate statement about real and nominal interest rates? a. Real interest rates can be either positive or negative, but nominal interest rates must be positive. b. Real interest rates and nominal interest rates must be positive. c. Real interest rates must be positive, but nominal interest rates can be either positive or negative. d. Real interest rates and nominal interest rates can be either positive or negative. ANSWER: a. Real interest rates can be either positive or negative, but nominal interest rates must be positive. TYPE: M DIFFICULTY: 1 SECTION: 11.2 137. If the real interest rate is 6 percent and the expected inflation rate is 4 percent then after a year a person expects to have a. 10 percent more dollars which will purchase 6 percent more goods. b. 10 percent more dollars which will purchase 4 percent more goods. c. 6 percent more dollars which will purchase 4 percent more goods. d. 6 percent more dollars which will purchase 2 percent more goods. ANSWER: a. 10 percent more dollars which will purchase 6 percent more goods. TYPE: M DIFFICULTY: 2 SECTION: 11.2 Chapter 11/Measuring the Cost of Living  323 138. Suppose that the real interest rate was 3 percent and the inflation rate was 1 percent. a. The dollar value of savings increased at 2 percent, and the value of savings measured in goods increased at 3 percent. b. The dollar value of savings increased at 1 percent, and the value of savings measured in goods increased at 2 percent. c. The dollar value of savings increased at 3 percent, and the value of savings measured in goods increased at 1 percent. d. The dollar value of savings increased at 4 percent, and the value of savings measured in goods increased at 3 percent. ANSWER: d. The dollar value of savings increased at 4 percent, and the value of savings measured in goods increased at 3 percent. TYPE: M DIFFICULTY: 2 SECTION: 11.2 139. Suppose that the nominal interest rate was 3 percent and the inflation rate was 1 percent. a. The dollar value of savings increased at 1 percent, and the value of savings measured in goods increased at 2 percent. b. The dollar value of savings increased at 2 percent, and the value of savings measured in goods increased at 3 percent. c. The dollar value of savings increased at 3 percent, and the value of savings measured in goods increased at 2 percent. d. The dollar value of savings increased at 4 percent, and the value of savings measured in goods increased at 3 percent. ANSWER: c. The dollar value of savings increased at 3 percent, and the value of savings measured in goods increased at 2 percent. TYPE: M DIFFICULTY: 2 SECTION: 11.2 140. Suppose that the nominal interest rate is 6 percent and the expected inflation rate is 4 percent. a. The dollar value of savings increases by 10 percent and the value of savings measured in goods is expected to increase by 6 percent b. The dollar value of savings increases by 10 percent and the value of savings measured in goods is expected to increase by 4 percent c. The dollar value of savings increases by 6 percent and the value of savings in goods is expected to increase by 4 percent d. The dollar value of savings increases by 6 percent and the value of savings in goods is expected to increase by 2 percent ANSWER: d. The dollar value of savings increases by 6 percent and the value of savings in goods is expected to increase by 2 percent TYPE: M DIFFICULTY: 2 SECTION: 11.2 141. Ralph puts money in the bank and earns a 5 percent nominal interest rate, if the inflation rate is 3 percent, a. Ralph will have 3 percent more money which will purchase 2 percent more goods. b. Ralph will have 3 percent more money which will purchase 8 percent more goods. c. Ralph will have 5 percent more money which will purchase 2 percent more goods. d. Ralph will have 5 percent more money which will purchase 8 percent more goods. ANSWER: c. Ralph will have 5 percent more money which will purchase 2 percent more goods. TYPE: M DIFFICULTY: 2 SECTION: 11.2 142. In Japan in 2000 nominal interest rates were 1.5 percent and the inflation rate was –.5 percent. The real interest rate was a. –2 percent. b. –1 percent. c. 1 percent. d. 2 percent. ANSWER: d. 2 percent. TYPE: M DIFFICULTY: 1 SECTION: 11.2 324  Chapter 11/Measuring the Cost of Living 143. Samantha deposits $1,000 in a saving account that pays an annual interest rate of 4 percent. Over the course of a year the inflation rate is 1 percent. At the end of the year Samantha has a. $50 more in her account, and her purchasing power has increased about $30. b. $40 more in her account, and her purchasing power has increased about $40. c. $40 more in her account, and her purchasing power has increased about $30. d. $30 more in her account and her purchasing power has increased about $50. ANSWER: c. $40 more in her account, and her purchasing power has increased about $30. TYPE: M DIFFICULTY: 2 SECTION: 11.2 144. Ms. Smith borrowed $1000 from her bank for one year at an interest rate of 10 percent per year. During that year the price level went up by 15 percent. Which of the following statements is correct? a. Ms. Smith will repay the bank fewer dollars than she initially borrowed. b. Ms. Smith's repayment will give the bank less purchasing power than it originally loaned her. c. Ms. Smith's repayment will give the bank greater purchasing power than it originally loaned her. d. Ms. Smith's repayment will give the bank the same purchasing power that it originally loaned her. ANSWER: b. Ms. Smith's repayment will give the bank less purchasing power than it originally loaned her. TYPE: M DIFFICULTY: 2 SECTION: 11.2 145. Jake loaned Elwood $5,000 for one year at a nominal interest rate of 10 percent. After Elwood repaid the loan in full, Jake complained that he could buy 4 percent fewer goods with the money Elwood gave him than he could before he loaned Elwood the $5,000. From this we can conclude that the rate of inflation during the year was a. 2.5 percent. b. 6 percent. c. 8 percent. d. 14 percent. ANSWER: d. 14 percent. TYPE: M DIFFICULTY: 3 SECTION: 11.2 146. In the country of Hyrkania, the CPI in 2000 was 120 and the CPI in 2001 was 132. Jake, a resident of Hyrkania, borrowed money in 2000 and repaid the loan in 2001. If the nominal interest rate on the loan was 12 percent, then the real interest rate was a. 12 percent. b. 10 percent. c. 2 percent. d. impossible to determine without knowing the base year for the CPI. ANSWER: c. 2 percent. TYPE: M DIFFICULTY: 3 SECTION: 11.2 147. Nominal interest rates were a. high in the 70s and 90s. b. low in the 70s and 90s. c. high in the 70s and low in the 90s. d. low in the 70s and high in the 90s. ANSWER: c. high in the 70s and low in the 90s. TYPE: M DIFFICULTY: 2 SECTION: 11.2 148. Real interest rates were a. high in the 70s and 90s. b. low in the 70s and 90s. c. high in the 70s and low in the 90s. d. low in the 70s and high in the 90s. ANSWER: d. low in the 70s and high in the 90s. TYPE: M DIFFICULTY: 2 SECTION: 11.2 149. Nominal interest rates were high in the a. 70s and real interest rates were high in the 90s. b. 70s and real interest rates were low in the 90s. c. 90s and real interest rates were high in the 70s. d. 90s and real interest rates were low in the 70s. ANSWER: a. 70s and real interest rates were high in the 90s. TYPE: M DIFFICULTY: 2 SECTION: 11.2 Chapter 11/Measuring the Cost of Living  325 150. In the late 1970s, nominal interest rates were high and inflation rates were very high. As a result, real interest rates were a. very high. b. moderately high. c. low, and in some years they were negative. d. low, but never negative. ANSWER: c. low, and in some years they were negative. TYPE: M DIFFICULTY: 2 SECTION: 11.2