Yeshiva University

Online Economics
Prof. David
Questions on Chapter 16 – Inflation and the CPI (Answers)

1. Babe Ruth, the famous baseball player, earned $80,000 in 1931. Today, the best baseball
players can earn more than 400 times as much as Babe Ruth earned in 1931. However, prices
have also risen since 1931. We can conclude that

a. the best baseball players today are about 400 times better off than Babe Ruth was in
1931.
b. because prices have also risen, the standard of living of baseball stars hasn't changed
since 1931.
c. one cannot make judgments about changes in the standard of living based on changes in
prices and changes in incomes.
d. one cannot determine whether baseball stars today enjoy a higher standard of living than
Babe Ruth did in 1931 without additional information regarding increases in prices since
1931.

2. The consumer price index is used to

a. monitor changes in the level of wholesale prices in the economy.
b. monitor changes in the cost of living over time.
c. monitor changes in the level of real GDP over time.
d. monitor changes in the stock market.

3. When the overall level of prices in the economy is increasing, economists say that the
economy is experiencing
a. economic growth.
b. stagflation.
c. inflation.
d. deflation.

4. The inflation rate is defined as the

a. price level in an economy.
b. change in the price level from one period to the next.
c. percentage change in the price level from the previous period.
d. price level minus the price level from the previous period.
5. The CPI is more commonly used as a gauge of inflation than the GDP deflator is because
a. the CPI is easier to measure.
b. the CPI is calculated more often than the GDP deflator is.
c. the CPI better reflects the goods and services bought by consumers.
d. the GDP deflator cannot be used to gauge inflation.

6. Which of the following statements is correct?

a. The CPI can be used to compare dollar figures from different points in time.
b. The percentage change in the CPI is a measure of the inflation rate, but the percentage
change in the GDP deflator is not a measure of the inflation rate.
c. Compared to the consumer price index (CPI), the GDP deflator is the more common
gauge of inflation.
d. The GDP deflator better reflects the goods and services bought by consumers than does
the CPI.

7. The CPI is calculated

a. weekly.
b. monthly.
c. quarterly.
d. yearly.

8. The steps involved in calculating the consumer price index and the inflation rate, in order, are
as follows:
a. Choose a base year, update the basket, find the prices, estimate the basket’s cost, compute
the index, and compute the inflation rate.
b. Choose a base year, fix the basket, find the prices, compute the inflation rate, compute
the basket's cost, and compute the index.
c. Fix the basket, find the prices, compute the basket's cost, choose a base year and compute
the index, and compute the inflation rate.
d. Fix the basket, find the prices, compute the inflation rate, compute the basket’s cost, and
choose a base year and compute the index.

9. The price index was 120 in 2006 and 127.2 in 2007. What was the inflation rate?
a. 5.7 percent
b. 6.0 percent
c. 7.2 percent
d. 27.2 percent

10. 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.
11. In the basket of goods that is used to compute the consumer price index, the three largest
categories of consumer spending are
a. housing, transportation, and recreation.
b. housing, transportation, and food & beverages.
c. housing, food & beverages, and education & communication.
d. housing, medical care, and education & communication.

12. Suppose the price of a quart of milk rises from $1.00 to $1.20 and the price of a T-shirt rises
from $8.00 to $9.60. If the CPI rises from 150 to 195, then people likely will buy
a. more milk and more T-shirts.
b. more milk and fewer T-shirts.
c. less milk and more T-shirts.
d. less milk and fewer T-shirts.

Table 11-9
The table below relates to the economy of Mainland, where the typical consumer’s market basket
consists of 2 iPhones and 3 hamburgers.
Year Price of an iPhone Price of a hamburger

2007 $400 $3

2008 $300 $5

2009 $325 $7

13. Refer to Table 11-9. If the base year is 2007, then the economy’s inflation rate in 2008 is
a. -24 percent.
b. -17 percent.
c. 9.2 percent.
d. 24 percent.

14. When the quality of a good improves while its price remains the same, the purchasing power
of the dollar

a. increases, so the CPI overstates the change in the cost of living if the quality change is not
accounted for.
b. increases, so the CPI understates the change in the cost of living if the quality change is
not accounted for.
c. decreases, so the CPI overstates the change in the cost of living if the quality change is not
accounted for.
d. decreases, so the CPI understates the change in the cost of living if the quality change is
not accounted for.
 15. Suppose lawn mowers are part of the market basket used to compute the CPI. Suppose
also that the quality of lawn mowers deteriorates while the price of lawn mowers stays
the same. If the Bureau of Labor Statistics is able to precisely adjust the CPI for the
improvement in quality, then, other things equal,
a. the CPI will rise.
b. the CPI will fall.
c. the CPI will stay the same.
d. lawn mowers will no longer be included in the market basket.

16. For some racquet sports, there have been increases in the size of the racquets; also, the
methods and materials used for making racquets have improved. To which problem in the
construction of the CPI is this situation most relevant?
a. substitution bias
b. introduction of new goods
c. unmeasured quality change
d. income bias