Chapter 11 Measuring the Cost of Living

THE CONSUMER PRICE INDEX

27.Suppose a basket of goods and services has been selected to calculate the CPI and 2002 has been
selected as the base year. In 2002, the basket’s cost was $50; in 2004, the basket’s cost was $52;
and in 2006, the basket’s cost was $57.25. The value of the CPI in 2006 was
a. 91.6.
b. 104.6.
c. 109.2.
d. 114.5.

28. Suppose a basket of goods and services has been selected to calculate the CPI. In 2002, the
basket’s cost was $80; in 2008, the basket’s cost was $92; and in 2010, the basket’s cost was
$108. The base year must be
a. 2002.
b. 2008.
c. one of the years between 2008 and 2010.
d. The base year cannot be determined from the given information.

35. The market basket used to calculate the CPI in Aquilonia is 4 loaves of bread, 6 gallons of milk,
2 shirts, and 2 pairs of pants. In 2005, bread cost $1.00 per loaf, milk cost $1.50 per gallon, shirts
cost $6.00 each, and pants cost $10.00 per pair. In 2006, bread cost $1.50 per loaf, milk cost
$2.00 per gallon, shirts cost $7.00 each, and pants cost $12.00 per pair. Using 2005 as the base
year, what was Aquilonia’s inflation rate in 2006?
a. 4 percent
b. 11 percent
c. 19.6 percent
d. 24.4 percent

Nominal GDP Real GDP GDP deflator

2005 45 45 100
2006 56 45 124.4

40. If the price index was 90 in year 1, 100 in year 2, and 95 in year 3, then the economy experienced
a. 10 percent inflation between years 1 and 2 ,and 5 percent inflation between years 2 and 3.
b. 10 percent inflation between years 1 and 2, and 5 percent deflation between years 2 and 3.
c. 11.1 percent inflation between years 1 and 2, and 5 percent inflation between years 2 and 3.
d. 11.1 percent inflation between years 1 and 2, and 5 percent deflation between years 2 and 3.

41. The price index was 150 in the first year, 160 in the second year, and 165 in the third year.
Which of the following statements is correct?
a. The price level was higher in the second year than in the first year, and it was higher in the
third year than in the second year.
b. The inflation rate was positive between the first and second years, and it was positive
between the second and third years.
c. The inflation rate was lower between the second and third years than it was between the first
and second years.
d. All of the above are correct.
48. In an imaginary economy, consumers buy only hot dogs and hamburgers. The fixed basket consists
of 10 hot dogs and 6 hamburgers. A hot dog cost $3 in 2006 and $5.40 in 2007. A hamburger
cost $5 in 2006 and $6 in 2007. Which of the following statements is correct?
a. When 2006 is chosen as the base year, the consumer price index is 90 in 2007.
b. When 2006 is chosen as the base year, the inflation rate is 150 percent in 2007.
c. When 2007 is chosen as the base year, the consumer price index is 100 in 2006.
d. When 2007 is chosen as the base year, the inflation rate is 50 percent in 2007.

49.In an imaginary economy, consumers buy only sandwiches and magazines. The fixed basket
consists of 20 sandwiches and 30 magazines. In 2006, a sandwich cost $4 and a magazine cost
$2. In 2007, a sandwich cost $5. The base year is 2006. If the consumer price index in 2007
was 125, then how much did a magazine cost in 2007?
a. $0.83
b. $2.25
c. $2.50
d. $3.00
Cost of basket :
2006 : 140
2007 : 100+30x=175
CPI :

57. Suppose the price index was 105 in 2007, 115.5 in 2008, and the inflation rate was lower
between 2008 and 2009 than it was between 2007 and 2008. This means that
a. the price index in 2009 was lower than 115.5.
b. the price index in 2009 was lower than 126.
c. the price index in 2009 was lower than 127.05.
d. the inflation rate between 2008 and 2009 was lower than 1.1 percent.

58.Assume an economy experienced a positive rate of inflation between 2003 and 2004 and again
between 2004 and 2005. However, the inflation rate was lower between 2004 and 2005 than it
was between 2003 and 2004. Which of the following scenarios is consistent with this
assumption?
a. The CPI was 100 in 2003, 110 in 2004, and 105 in 2005.
b. The CPI was 100 in 2003, 120 in 2004, and 135 in 2005.
c. The CPI was 100 in 2003, 105 in 2004, and 130 in 2005.
d. The CPI was 100 in 2003, 90 in 2004, and 88 in 2005.

60. For an imaginary economy, the consumer price index was 62.50 in 2004, 100.00 in 2005, and
160.00 in 2006. Which of the following statements is correct?
a. If the basket of goods that is used to calculate the CPI cost $80 in 2004, then that basket of
goods cost $128 in 2005. (inflation rate)
b. If the basket of goods that is used to calculate the CPI cost $90 in 2005, then that basket of
goods cost $150 in 2006.
c. The overall level of prices increased by 97.5 percent between 2004 and 2006.
d. All of the above are correct.
Table 11-3
The table below pertains to Studious, an economy in which the typical consumer’s basket
consists of 5 books and 10 calculators.
Year Price of a Price of a Cost of the
Book Calculator basket
2006 $24 $8 200
2007 $30 $12 270
2008 $32 $15 310

79. Refer to Table 11-3. The cost of the basket in 2006 was
a. $32.
b. $200.
c. $280.
d. $480.

80. Refer to Table 11-3. The cost of the basket

a. increased from 2006 to 2007 and increased from 2007 to 2008.
b. increased from 2006 to 2007 and decreased from 2007 to 2008.
c. decreased from 2006 to 2007 and increased from 2007 to 2008.
d. decreased from 2006 to 2007 and decreased from 2007 to 2008.

81. Refer to Table 11-3. The cost of the basket

a. increased by $10 from 2006 to 2007.
b. increased by $42 from 2006 to 2007.
c. increased by $70 from 2006 to 2007.
d. increased by $150 from 2006 to 2007.

82. Refer to Table 11-3. If 2006 is the base year, then the consumer price index was
a. 100 in 2006, 135 in 2007, and 155 in 2008.
b. 100 in 2006, 270 in 2007, and 310 in 2008.
c. 200 in 2006, 135 in 2007, and 155 in 2008.
d. 200 in 2006, 270 in 2007, and 310 in 2008.

83. Refer to Table 11-3. If 2007 is the base year, then the consumer price index was
a. 74.1 in 2006, 100 in 2007, and 114.8 in 2008.
b. 74.1 in 2006, 270 in 2007, and 310 in 2008.
c. 200 in 2006, 100 in 2007, and 114.8 in 2008.
d. 200 in 2006, 270 in 2007, and 310 in 2008.

84. Refer to Table 11-3. If 2008 is the base year, then the consumer price index was
a. 64.5 in 2006, 87.1 in 2007, and 100 in 2008.
b. 64.5 in 2006, 270 in 2007, and 310 in 2008.
c. 200 in 2006, 87.1 in 2007, and 100 in 2008.
d. 200 in 2006, 270 in 2007, and 310 in 2008.

85. Refer to Table 11-3. The inflation rate was

a. 22.6 percent in 2007 and 12.9 percent in 2008.
b. 25.9 percent in 2007 and 14.8 percent in 2008.
c. 35 percent in 2007 and 14.8 percent in 2008.
d. 35 percent in 2007 and 20 percent in 2008.
Table 11-6. The table below applies to an economy with only two goods — hamburgers and hot dogs.
The fixed basket consists of 4 hamburgers and 8 hot dogs.
Year Price of hamburgers Price of hot dogs
2009 $5.00 $3.00 44
2010 5.50 3.30 48,4
2011 5.61 3.63 51,48

102. Refer to Table 11-6. If the base year is 2009, then the consumer price index is
a. 100 in 2009, 109 in 2010, and 115 in 2011.
b. 100 in 2009, 110 in 2010, and 117 in 2011.
c. 110 in 2009, 121 in 2010, and 128.26 in 2011.
d. 44 in 2009, 48.4 in 2010, and 51.48 in 2011.

103. Refer to Table 11-6. If the base year is 2009, then the economy’s inflation rate in 2010 is
a. 8 percent.
b. 10 percent.
c. 10.91 percent.
d. 11.11 percent.

104. Refer to Table 11-6. If the base year is 2009, then the economy’s inflation rate is
a. 10 percent in 2010 and 6.36 percent in 2011.
b. 10 percent in 2010 and 17 percent in 2011.
c. 9.2 percent in 2010 and 6 percent in 2011.
d. 8.22 percent in 2010 and 5 percent in 2011.

105. Refer to Table 11-6. If the base year is 2010, then the consumer price index is
a. 100 in 2009, 109 in 2010, and 115 in 2011.
b. 95.90 in 2009, 100 in 2010, and 107.44 in 2011.
c. 90.91 in 2009, 100 in 2010, and 106.36 in 2011.
d. 88.82 in 2009, 100 in 2010, and 107.44 in 2011.
106. Refer to Table 11-6. If the base year is 2010, then the economy’s inflation rate in 2010 is
a. 8 percent.
b. 10 percent.
c. 10.91 percent.
d. 11.11 percent.

107. Refer to Table 11-6. If the base year is 2010, then the economy’s inflation rate is
a. 2 percent in 2010 and 7 percent in 2011.
b. 4.5 percent in 2010 and 5.2 percent in 2011.
c. 9 percent in 2010 and 5.5 percent in 2011.
d. 10 percent in 2010 and 6.36 percent in 2011.

108. Refer to Table 11-6. Which of the following scenarios is consistent with this statement? “The
rate of inflation was 23.75 percent for 2011.”
a. The price of a hot dog was $2.44 rather than $3.30 in 2010, with other prices in the table
remaining fixed.
b. The price of a hot dog was $4.22 rather than $3.63 in 2011, with other prices in the table
remaining fixed..
c. The price of a hamburger was $3.80 rather than $5.50 in 2010, with other prices in the table
remaining fixed.
d. The price of a hamburger was $6.60 rather than $5.61 in 2011, with other prices in the table
remaining fixed.

109. Refer to Table 11-6. Which of the following scenarios is consistent with this statement? “The
cost of living increased by 25 percent between 2009 and 2011.”
a. The price of a hot dog was $2.24 rather than $3.00 in 2009, with other prices in the table
remaining fixed.
b. The price of a hot dog was $4.07 rather than $3.63 in 2011, with other prices in the table
remaining fixed..
c. The price of a hamburger was $4.24 rather than $5.00 in 2009, with other prices in the table
remaining fixed.
d. The price of a hamburger was $5.96 rather than $5.61 in 2011, with other prices in the table
remaining fixed.

110. Refer to Table 11-6. Between 2010 and 2011, the cost of living increased by
a. 5.30 percent.
b. 6.36 percent.
c. 7.78 percent.
d. We need to know the base year in order to answer this question.

111. Refer to Table 11-6. Between 2009 and 2011, the cost of living increased by
a. 6 percent.
b. 19 percent.
c. 14 percent.
d. 17 percent.
CORRECTING ECONOMIC VARIABLES FOR THE EFFECTS OF INFLATION

49. Refer to Table 11-12. To the nearest dollar, Will’s 2010 food expenditures in 2009 dollars
amount to
a. $5,236.
b. $5,431.
c. $5,524.
d. $5,608.

50. Refer to Table 11-12. Suppose Will’s 2010 food expenditures in 2011 dollars amount to $6,235.
Then x, the consumer price index for 2011, has a value of
a. 171.2.
b. 175.0.
c. 177.5.
d. 180.6.

51. Refer to Table 11-12. Suppose Will’s 2009 food expenditures in 2011 dollars amount to $5,750.
Then x, the consumer price index for 2011, has a value of
a. 184.0.
b. 185.8.
c. 187.5.
d. 189.4.

52. Refer to Table 11-12. Suppose the consumer price index is 15.5 percent higher in 2011 than in
2009. Then Will’s food expenditures for 2010 in 2011 dollars amount to
a. $6,352.
b. $6,380.
c. $6,426.
d. $6,651.

53. Refer to Table 11-12. Suppose Will’s 2009 food expenditures in 2011 dollars amount to $5,670.
Then
a. the consumer price index was 11.8 percent higher in 2011 than it was in 2009.
b. the inflation rate in 2011 was 8 percent.
c. Will’s 2011 food expenditures in 2009 dollars amount to $5,740.
d. Will’s 2010 food expenditures in 2011 dollars amount to $6,210.

54. Refer to Table 11-12. Suppose Will’s 2009 food expenditures in 2011 dollars amounted to
$5,670. Suppose also that the real interest rate in 2011 was 3 percent. Then, in 2011,
a. the inflation rate was 8 percent and the nominal interest rate was 5 percent.
b. the inflation rate was 9 percent and the nominal interest rate was 6 percent.
c. the inflation rate was 8 percent and the nominal interest rate was 11 percent.
d. the inflation rate was 9 percent and the nominal interest rate was 12 percent.

55. Refer to Table 11-12. If the nominal interest rate was 8 percent in 2010, then
a. the real interest rate in 2010 was 3 percent.
b. the real interest rate in 2010 was 4 percent.
c. Will’s 2009 food expenditures in 2010 dollars amount to $5,800.
d. Will’s 2009 food expenditures in 2011 dollars amount to $6,200.

56. Refer to Table 11-12. Suppose Will’s 2009 food expenditures in 2011 dollars amount to $5,750.
Then the inflation rate for 2011 is about
a. 9.08 percent.
b. 9.52 percent.
c. 10.24 percent.
d. 10.78 percent.