chapter 6 econ 252 Questions with Correct Answers (Grade A+)
Question 1: Consumer Price Index (CPI)
Answer: a measure of the overall cost of the goods and services bought by a typical consumer
Question 2: consumer price index formula :
Answer: (Price of basket of goods and services in current year/price of basket in base year) x 100
Question 3: inflation rate in year 2 =
Answer: CPI Year 2 - CPI Year 1/ CPI Year 1 x 100
Question 4: Core CPI
Answer: a measure of the overall cost of consumer goods and services excluding food and energy
- core CPI better reflects ongoing inflation trends
- goal of CPI is to measure changes in the cost of living
- the CPI tries to estimate how much incomes must rise to maintain a constant standard of living
Question 5: Producer Price Index (PPI)
Answer: An index that measures the cost of a basket of goods and services bought by firms rather than
consumers
- changes in the PPI are often thought to be useful in predicting changes in the CPI
Question 6: Is CPI a perfect measure of the cost of living? and why
Answer: no! prob 1: substitution bias - when prices change from year to year, they do not change
proportionally. consumers respond to different prices prob 2: introduction of new goods
- when a new good is introduced, consumers have more variety from which to choose, and this in turn
reduces the cost of maintaining the same level of economic well-being
Question 7: Which of the following, if true, would illustrate why price indexes such as the CSPI might
overstate inflation in the cost of going to college? Check all that apply. -1. Professors required each
student to buy 10 notebooks, regardless of the price. -2. As the price of calculators rose, fewer students
decided to buy them, opting instead to use the free calculators in their cell phones or on their
computers. -3. A new mobile device for personal computing became available for purchase. -4. Energy
drinks became increasingly popular on college campuses between 2017 and 2019 due to significant
improvements in flavor, but this quality change is hard to measure.
Answer: 2,3,4
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Question 1: Consumer Price Index (CPI)
Answer: a measure of the overall cost of the goods and services bought by a typical consumer
Question 2: consumer price index formula :
Answer: (Price of basket of goods and services in current year/price of basket in base year) x 100
Question 3: inflation rate in year 2 =
Answer: CPI Year 2 - CPI Year 1/ CPI Year 1 x 100
Question 4: Core CPI
Answer: a measure of the overall cost of consumer goods and services excluding food and energy
- core CPI better reflects ongoing inflation trends
- goal of CPI is to measure changes in the cost of living
- the CPI tries to estimate how much incomes must rise to maintain a constant standard of living
Question 5: Producer Price Index (PPI)
Answer: An index that measures the cost of a basket of goods and services bought by firms rather than
consumers
- changes in the PPI are often thought to be useful in predicting changes in the CPI
Question 6: Is CPI a perfect measure of the cost of living? and why
Answer: no! prob 1: substitution bias - when prices change from year to year, they do not change
proportionally. consumers respond to different prices prob 2: introduction of new goods
- when a new good is introduced, consumers have more variety from which to choose, and this in turn
reduces the cost of maintaining the same level of economic well-being
Question 7: Which of the following, if true, would illustrate why price indexes such as the CSPI might
overstate inflation in the cost of going to college? Check all that apply. -1. Professors required each
student to buy 10 notebooks, regardless of the price. -2. As the price of calculators rose, fewer students
decided to buy them, opting instead to use the free calculators in their cell phones or on their
computers. -3. A new mobile device for personal computing became available for purchase. -4. Energy
drinks became increasingly popular on college campuses between 2017 and 2019 due to significant
improvements in flavor, but this quality change is hard to measure.
Answer: 2,3,4
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