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Question 1

1 / 1 pts

A loaf of bread cost $0.18 in 1955 and the CPI was 26.8. The CPI in 2013 was 233. The cost of a loaf of bread in 1955 using 2013 dollars would be?

$0.02

$1.56

FEEDBACK: If the price level in the later time is greater than the price level in the earlier time, the conversion of the earlier price will make the earlier price greater than its original value.

$1.80

$156.00

Question 2

1 / 1 pts

If healthcare costs make up 8% of total consumer expenditures and they rise by 15% while the other components in the consumer price index remain constant, by how much will the price index rise?

1.2%

FEEDBACK: Suppose the CPI in the first year is 100. If healthcare costs are 8% of total expenditures then they account for 8 of the 100 points, with the 92 other points falling in other categories. If healthcare prices rise by 15% in the second year, then those 8 points become 9.2 points. Since the prices of the other categories have not changed, the CPI now stands at 101.2, since 9.2 + 92 = 101.2.Using our formula for calculating the inflation rate, the rise in healthcare costs raised the overall price level by 1.2%.

(101.2 – 100) ÷ 100 × 100 = 1.2%.

9.2%

15.0%

23.0%

FEEDBACK: Suppose the CPI in the first year is 100. If healthcare costs are 8% of total expenditures then they account for 8 of the 100 points, with the 92 other points falling in other categories. If healthcare prices rise by 15% in the second year, then those 8 points become 9.2 points. Since the prices of the other categories have not changed, the CPI now stands at 101.2, since 9.2 + 92 = 101.2.

Using our formula for calculating the inflation rate, the rise in healthcare costs raised the overall price level by 1.2%.

(101.2 – 100) ÷ 100 × 100 = 1.2%.

Question 3

1 / 1 pts

If your boss calls you into her office and offers you a promotion, which will include a 5% pay increase, how would you evaluate the value of your raise?

Very good, since the rate of inflation is 6%.

Very good, since the rate of inflation is 1%.

FEEDBACK: When evaluating a raise, you need to account for the rate of inflation over the course of a year. If the inflation rate is greater than the percentage raise in your wage, then you are worse off, as your real income will fall. If the inflation rate is lower than the percentage raise in your wage, then you are better off, as your real income rises. Keep in mind that we want to examine real income and purchasing power as opposed to nominal income and purchasing power. If we think a raise of 5% is great when the inflation rate is higher than 5%, then we are suffering from money illusion.

Bad, since the rate of inflation is 1%.

Bad, since the rate of inflation is 4%.

Question 4

1 / 1 pts

In 1991, the Barenaked Ladies released their hit song “If I Had a Million Dollars.” How much money would the group need to have a million dollars’ worth of purchasing power in 2012 rounded to the nearest cent? Note that the consumer price index in 1991 was 136.2 and in 2012 it was 230.0.

$1,000,000.00

$1,688,693.10

FEEDBACK: $1,688,693.10. Recall that to convert 1991 prices to 2012 prices we need to multiply the old price by the ratio of the CPIs. $1,000,000 x (230.0 / 136.2) = $1,688,693.10.

$592,173.91

Question 5

1 / 1 pts

Let’s say you plan to retire 40 years from now, and you decide you could live on $40,000 per year if you retired today. If the average annual inflation rate is 3% between now and your retirement date, how much money per year would you need to have saved?

$41,200

$120,000

$130,400

FEEDBACK: For this question, you would need to know how many future dollars match today’s dollar. By using the bar chart in the Economics for Life box we can determine the equivalent of $1 in 40 years. The x-axis tells you that, at an inflation rate of 3%, you would need $3.26 (in 40 years) to match today’s $1. To have enough savings to supply you with the equivalent of $40,000 per year at 3% average inflation rate: take 40,000 × $3.26, or $130,400 per year, just to keep pace with inflation.

Question 6

1 / 1 pts

Suppose the prices of homes go up by 10 % and the prices of concert tickets rise by 20%, which will have the larger impact on the CPI?

the change in house prices

FEEDBACK: The average consumer spends a much larger portion of their income on housing as compared to concert tickets, so the increase in the price of homes will have a larger impact on the CPI.

the change in concert ticket prices

they will both have the same impact

there is not enough information to make a decision.

Question 7

1 / 1 pts

Suppose you sign a two- year job contract with Wells Fargo stipulating that you will receive an annual salary of $93,500 plus an additional 2% over that in the second year to account for expected inflation. Based on this scenario, which of the following statements is true?

If the inflation rate turns out to be 3% rather than 2%, Wells Fargo will be worse off.

If the inflation rate turns out to be 3% rather than 2%, you will be worse off.

FEEDBACK: If inflation 3 percent turns out to be greater than your salary, increase, 2%, then you the worker, will suffer because your salary will not allow you to afford the same basket of goods and services that you bought the previous year. If inflation, 1% turns out to be lower than your salary increase, then Wells Fargo is worse off. In a case like this the price at which a firm must pay their employee rose by more than the prices at which they could sell their goods.

If the inflation rate turns out to be 1% rather than 2%, you will be worse off.

Question 8

1 / 1 pts

The Bureau of Labor Statistics reported the consumer price index as 211.4 in December 2007, and 231.1 in December 2012. By what percentage did the index increase from the end of 2007 to the end of 2012 (rounded to one decimal place)?

0.09%

9.0%

9.3%

FEEDBACK: In December 2012, the CPI stood at 231.1, up from 211.4 in December 2007. This is a 9.3% increase: (231.1 – 211.4) ÷ 211.4 × 100 = 9.3.

19.7%

Question 9

1 / 1 pts

The equation of exchange is helpful for determining the effect of money supply changes on the price level. Using this concept, which of the following statements is true?

Real GDP grows at 3% and inflation is equal to 2%, and with no change in velocity, there is no change in the money supply.

Real GDP falls by 3% and there is no inflation, but the money supply grew by 5%.Therefore the change in velocity would be negative 8 percent

The equation of exchange in rates of growth is %ΔM + %ΔV ≈ %ΔP + %ΔYIf real gdp grows at 3% and inflation is equal to 2%, with no change in velocity we would have the following %ΔM + 0 ≈ 2% + 3%. Thus %ΔM ≈ 5%. If real gdp falls by 3 percent with no inflation, and the money supply grows by 5 percent, then 5% + %ΔV ≈ 0 + -3%. So the %ΔV ≈ -8%.

If real GDP increases by 3 percent, with no change in velocity, and money supply grows by 10%, then 10% + 0 ≈ %ΔP + 3%, so%ΔP ≈ 7%.

Real GDP increases by 3%, velocity does not change, and the money supply grows by 10%. The implied rate of inflation would be 13%

The equation of exchange in rates of growth is %ΔM + %ΔV ≈ %ΔP + %ΔY

If real gdp grows at 3% and inflation is equal to 2%, with no change in velocity we would have the following %ΔM + 0 ≈ 2% + 3%. Thus %ΔM ≈ 5%. If real gdp falls by 3 percent with no inflation, and the money supply grows by 5 percent, then 5% + %ΔV ≈ 0 + -3%. So the %ΔV ≈ -8%.

If real GDP increases by 3 percent, with no change in velocity, and money supply grows by 10%, then 10% + 0 ≈ %ΔP + 3%, so%ΔP ≈ 7%.

Question 10

1 / 1 pts

The table shown here gives a cost-of-living index for 14 different cities. If you are living and working in Phoenix and earning $100,700 per year, to have the same standard of living in Manhattan you would need

Click to view larger image.

Click to view larger image.

$116

$100,700

$116,000

$216,700

FEEDBACK: Using the information provided in the table, plug in the appropriate values. The cost of living index is 100.7 for Phoenix and 216.7 for Manhattan. In this case, you just need to multiply each index by 1,000: a salary of $100,700 in Phoenix is equal to a salary of $216,700 in Manhattan. Your nominal wage might increase significantly, but your real wage will not; it would take $216,700 per year in Manhattan to maintain the same standard of living you enjoyed in Phoenix.

Question 11

1 / 1 pts

Which of the following statements are NOT true about inflation?

It occurs when the overall level of prices increases.

Some prices may fall even when most others rise.

Some prices affect consumers more than others.

When in the 2-4% range, it can be a sign of a healthy economy.

When in the 2-4% range, it can be the sign of a weak economy.

FEEDBACK: Looking at the definition, and how we use CPI to measure inflation, we can see that inflation means we have an overall price increase, not just a price increase for one or two items. With an overall increase, the price of some items may even fall while others are rising; as long as the net impact is an increase, we have inflation. The basket of goods represents the typical urban family, so not every consumer buys every item in the basket. For example, the price of higher education increases more than the overall inflation rate, yet not everyone is attending and paying for college, so this increase will affect college students more than other members of the population. Or, if the price of hay is rapidly increasing, that is not included in the CPI calculation because it’s not purchased by the typical urban family. Deflation is a sign of an unhealthy economy, and hyperinflation leads to price confusion as well as other problems.

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