Chapter 15

Index Numbers

True/False

1. An index number is a percent that measures the change in price, quantity, value, or some other item of
interest from one time to another.
Answer: True Difficulty: Easy Goal: 1 AACSB: AS

2. An index of 239.2 and an index of 86.4 are actually percents.

Answer: True Difficulty: Easy Goal: 1

3. All indexes have the same base, namely 1982-84, written 1982-84=100.
Answer: False Difficulty: Easy Goal: 1

4. The base period for one index might be 1982-84, while the base period for another index might be
1990.
Answer: True Difficulty: Easy Goal: 1

5. The base number for most indexes is 1.

Answer: False Difficulty: Easy Goal: 1

6. No systematic approach to collecting and reporting data an index was evident in the United States until
about 1900.
Answer: True Difficulty: Easy Goal: 6 AACSB: IT

7. An Italian, G.R. Carli, has been credited with originating the first index numbers in 1764.
Answer: True Difficulty: Easy Goal: 1

8. An index is a convenient way of comparing changes for different variables, i.e., average income and
food prices.
Answer: True Difficulty: Easy Goal: 6

9. Most business and economic indexes are carried either to the nearest whole percent, such as 312 or 96,
or to the nearest 10th of a percent, such as 97.5 and 178.6.
Answer: True Difficulty: Easy Goal: 1

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1 Test Bank, Chapter 15
10. Converting data to indexes makes it easier to compare the trend in a series composed of exceptionally
large numbers.
Answer: True Difficulty: Easy Goal: 1 AACSB: CA

11. The base-period price is designated as pn and the price for the given period is designated p0.
Answer: False Difficulty: Easy Goal: 2 AACSB: AS

12. Etienne Laspeyres developed a method in the latter part of the 18th century to determine a weighted
index using base-period weights.
Answer: True Difficulty: Easy Goal: 3

13. Two methods of computing a weighted price index are the Laspeyres' method and Paasche's method.
Answer: True Difficulty: Easy Goal: 4 AACSB: IT

14. The Laspeyres' method uses the amounts consumed in the base period, q0 , as weights to determine a
price index.
Answer: True Difficulty: Easy Goal: 2

15. If we are constructing a weighted index of the price of food for 2007 using the Laspeyres' method and
1982-84 = 100, we use the amounts consumed in the base period, q0, as weights.
Answer: True Difficulty: Easy Goal: 3 AACSB: AS

16. The CPI serves only one major function: as an economic indicator of the rate of inflation in the
United States.
Answer: False Difficulty: Medium Goal: 6

17. To construct a special-purpose index designed to measure general business activity, the weights are
based on the judgments of the statistician and assigned to each series.
Answer: True Difficulty: Easy Goal: 6

18. The Consumer Price Index measures the change in prices of a fixed market basket of goods and
services from one period to another.
Answer: True Difficulty: Easy Goal: 6 AACSB: MD

19. One function of the CPI is to allow consumers to determine the degree to which their purchasing
power is being eroded by price increases.
Answer: True Difficulty: Easy Goal: 6

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3 Test Bank, Chapter 15
20. The CPI is used as a yardstick for revising wages, pensions and other income payments to keep pace
with changes in prices or inflation.
Answer: True Difficulty: Easy Goal: 6 AACSB: MD

21. The Consumer Price Index originated in 1913 and has been published regularly since 1921.
Answer: True Difficulty: Easy Goal: 6

22. The CPI is not just one index, but includes a large number of groups, subgroups and selected items,
such as a food index, a medical care index and an entertainment index.
Answer: True Difficulty: Easy Goal: 6

23. The first of two Consumer Price Indexes is for all urban consumers and covers about 80 percent of
the total non-institutional population, while the second one is for urban wage earners and clerical workers
and covers about half the population.
Answer: True Difficulty: Easy Goal: 6

24. The concept of real income is sometimes called deflated income or income expressed in constant
dollars and the CPI is called the deflator.
Answer: True Difficulty: Easy Goal: 6

25. To deflate sales, the actual sales are multiplied by the wholesale price index and the result multiplied
by 100.
Answer: False Difficulty: Easy Goal: 6

26. Social security, pensions, many apartment leases and many labor contracts are tied to the change in
the CPI.
Answer: True Difficulty: Easy Goal: 6 AACSB: MD

27. Millions of employees in automobile, steel, and other industries have their wages adjusted upward
when the CPI increases. The specifics are in the management-union contracts. These clauses in the
contracts are referred to as "escalator clauses."
Answer: True Difficulty: Easy Goal: 6 AACSB: MD

28. If two or more series of index numbers have the same year as the base period, then they can be
compared directly.
Answer: True Difficulty: Easy Goal: 6

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29. When two or more series of index numbers to be compared do not have the same base period, we
select a common base period for all series. Then we use the respective base numbers as the denominators
and convert each base to the new base.
Answer: True Difficulty: Easy Goal: 6

Multiple Choice

30. If the average hourly earnings in mining in 1998 was $7.67 and for the most recent month it was
$14.90, what is the index of hourly earnings for the most recent month based on 1998?
A) 100.0
B) 186.9
C) 151.5
D) 194.3
Answer: D Difficulty: Medium Goal: 2 AACSB: AS

31. The Bureau of the Census reported that the farm population dropped from 30.5 million in 1940 to 6.5
million in 1999. What is the index for 1999 based on 1940?
A) 469.7
B) 100.0
C) 21.3
D) 78.7
Answer: C Difficulty: Medium Goal: 2 AACSB: AS

32. Besides measuring change in the prices of goods and services, the consumer price index has a
number of other applications such as:
A) To determine real disposable personal income,
B) To deflate sales or other data series,
C) To find the purchasing power of the dollar
D) Establish cost of living increases.
E) All of the above.
Answer: E Difficulty: Easy Goal: 6

33. Sean McCarthy earns $20,000 a year; John Nowak, $35,000. What is John's income as an index using
Sean's income as the base?
A) 1.75
B) 75.0
C) 100.0
D) 57.1
E) None of the above
Answer: E Difficulty: Medium Goal: 2 AACSB: AS

5 Test Bank, Chapter 15

34. The wholesale price of a straight back desk chair in 2004 was $70; in 2005, $80.50; and in 2006, $63.
What were the indexes for 2005 and 2006 using 2004 = 100?
A) 115.0 and 90.0
B) 1.15 and 0.9
C) 1150.0 and 900.0
D) 87.0 and 111.1
Answer: A Difficulty: Medium Goal: 2

35. An index of clothing prices for 2006 based on 1985 is to be constructed. The prices for 1985 and
2006 and the quantity consumed in 1985 are shown below.

Assuming that the number sold remained constant, i.e., the same number were sold in 2006 as in 1985,
what is the weighted index of price for 2006 using 1985 as the base?
A) 206.7
B) 214.5
C) 48.4
D) 46.6
Answer: B Difficulty: Medium Goal: 3 AACSB: AS

36. Real income is computed by

A) Dividing money income by the CPI and multiplying by 100.
B) Dividing the CPI by money income and multiplying by 100.
C) Multiplying money income by the CPI.
D) Subtracting the CPI from money income.
Answer: A Difficulty: Medium Goal: 6

37. Prices and the number produced for selected agricultural items are:

Using the Laspeyres method, what price index of agricultural production for 2006 (1980 = 100)?
A) 42.5
B) 129.7
C) 117.1
D) 85.3
Answer: B Difficulty: Medium Goal: 3

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38. The number of items produced and the price per item for the Duffy Manufacturing Company are:

What is the value index of production for 2006 using 1990 as the base period?
A) 115.2
B) 72.9
C) 110.6
D) 127.1
Answer: D Difficulty: Hard Goal: 5

39. As chief statistician for the county, you want to compute and publish every year a special-purpose
index, which you plan to call Index of County Business Activity. Three series seem to hold promise as
the basis for the index; namely, the price of cotton, the number of new cars sold, and the rate of money
turnover for the county (published by a local bank). Arbitrarily you decide that money turnover should
have a weight of 60 percent; number of new cars sold, 30 percent; and the price of cotton, 10 percent.

What is the Index of County Business Activity for 1981 (the base year) and for 2006?
A) 100 for 1981, 139 for 2006
B) 139 for 1981, 100 for 2006
C) 100 for 1981, 61 for 2006
D) 100 for 1981, 100 for 2006
Answer: A Difficulty: Medium Goal: 6

40. The Consumer Price Index in June 2006 was 159.3 (1982-84 = 100). What does this indicate about
prices from 1982-84 to June 2006?
A) Rose 59.3%
B) Rose 100.0%
C) Rose 159.3%
D) Declined 159.3%
Answer: A Difficulty: Medium Goal: 6

41. Below is Jim Walker's income for 1995 and 2007.

7 Test Bank, Chapter 15

What was Jim's real income for 2007?
A) $37,000
B) $67,000
C) $34,387
D) $38,908
Answer: D Difficulty: Medium Goal: 6

42. The take home pay of an employee working in an urban area for 1993and 2007are:

If the CPI rose from 159 in 1993 to 210 in 2007 (1982-84 = 100), what was the "real" take home pay of
the employee in 2007?
A) $5,000
B) $15,000
C) $113,200
D) $53,904
Answer: D Difficulty: Medium Goal: 6

43. How is the purchasing power of the dollar computed?

A) ($1/CPI) (100)
B) ($1 - CPI) (100)
C) ($1 x CPI) (100)
D) (CPI/$1) (100)
Answer: A Difficulty: Medium Goal: 6

44. If the Consumer Price Index in June 2006 was about 202.9 (1982-84 = 100), what was the purchasing
power of the dollar?
A) $1.00
B) $0.33
C) $0.58
D) $0.49
Answer: D Difficulty: Medium Goal: 6

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45. An index number is a percent that measures the change from one period of time to another in terms
of?
A) Value
B) Price
C) Quantity
D) All of the above
Answer: D Difficulty: Medium Goal: 1

46. How can indexes be classified?

A) Price
B) Quantity
C) Value
D) Special purpose
E) All of the above
Answer: E Difficulty: Medium Goal: 3

47. The CPI for "personal computers and peripheral equipment" in June 2006 was 10.7 (1982-
1984=100). Interpret this index.
A) There was no significant increase in the price of "personal computers and peripheral equipment"
B) The price of "personal computers and peripheral equipment" increased 10.7%.
C) The price of "personal computers and peripheral equipment" decreased 89.3%.
D) If the average price of a computer in 1982-1984 was $3000.00, the CPI for "personal computers and
peripheral equipment" would predict that the price of a computer in June 2006 would be $893.
Answer: C Difficulty: Medium Goal: 6

48. The CPI for "educational books and supplies" in June of 2006 was 386.7 (1982-1984=100). Interpret
this index.
A) There was no significant increase in the price of "educational books and supplies".
B) The price of "educational books and supplies" increased 386.7 times.
C) If the average price of a textbook in 1982-1984 was $25.00, the CPI for "educational books and
supplies" would predict that the price of the textbook in June 2006 would be $71.68.
D) If the average price of a textbook in 1982-1984 was $25.00, the CPI for "educational books and
supplies" would predict that the price of the textbook in June 2006 would be $96.68.
Answer: C Difficulty: Medium Goal: 6

49. What does a typical market basket of goods and services include?
A) Bread
B) Beer
C) Milk
D) All of the above
Answer: D Difficulty: Medium Goal: 6

9 Test Bank, Chapter 15

Fill-in-the-Blank

50. There are several indexes that reflect the overall economic activity in the United States. The federal
government puts out an index of leading economic indicators. It includes such diverse economic
indicators as stock prices, new orders for plants and equipment, and building permits issued. What are
these indexes usually referred to as? _______________________
Answer: special purpose Difficulty: Medium Goal: 1

51. What is the base year for the Consumer Price Index currently? _______
Answer: 1982-84 Difficulty: Medium Goal: 6

52. What is the index that measures the average change in prices received in the primary markets of the
United States by producers of commodities? _________________________________
Answer: producers price index Difficulty: Medium Goal: 1

53. What is a price index for a single commodity called? __________

Answer: relative Difficulty: Medium Goal: 1

54. What is the symbol used to designate a base period price? _______
Answer: p0 Difficulty: Medium Goal: 2

55. What is the usual index number associated with the base period for the CPI? ______
Answer: 100 Difficulty: Medium Goal: 2

56. What is a major disadvantage of the unweighted price index? ______________________________

Answer: extremely large or small values overly influence the index Difficulty: Medium Goal:
2

57. Which method for computing a weighted price index uses current year weights? _____________
Answer: Paasche Difficulty: Medium Goal: 4

58. What is another name for the unweighted method of computing an index? _____________________
Answer: simple aggregate Difficulty: Medium Goal: 2

59. Which method of computing index numbers has the advantage that the consumption pattern is always
up-to-date? _____________________
Answer: Paasche Difficulty: Medium Goal: 4

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60. Which index is computed using base year prices and quantities and current year prices and quantities
together? _____________
Answer: value Difficulty: Medium Goal: 5

61. Which index measures the change in the prices of a fixed market basket of goods and services from
one time period to another? ___________
Answer: Consumer Price Index (CPI) Difficulty: Medium Goal: 6

62. What is another term for real income? _______________

Answer: deflated income Difficulty: Medium Goal: 6

63. What is the CPI called when it determines real income? ___________
Answer: deflator Difficulty: Medium Goal: 6

64. If we divide one dollar by the CPI and multiply it this result by 100, what is the result called?
_________________________
Answer: purchasing power of the dollar Difficulty: Medium Goal: 6

65. What do we call a percent that measures the change in price, quantity, value or some other item of
interest from one time period to another? ______________________
Answer: index number Difficulty: Medium Goal: 1

Essay

66. Describe the process of collecting data for the CPI.

Answer: The Consumer Price Index is based on about 400 items, and about 250 part-time and full-time
agents collect price data monthly. Prices are collected from more than 18,000 tenants, 24,000 retail
establishments and 18,000 housing units in 85 urban areas across the country. Difficulty: Easy
Goal: 6

67. List some example items that are included in the CPI that represent a typical "market basket" of
goods.
Answer: The prices of baby cribs, bread, beer, cigars and operating-room charges are just a few of the
items included in what is often termed a typical "market basket" of goods and services.
Difficulty: Easy Goal: 6

11 Test Bank, Chapter 15

Multiple Choice

Use the following to answer questions 68-78:

Data for selected vegetables purchased at wholesale prices for 1995 and 2007 are shown below.

68. What is the unweighted aggregate price index?

A) 98.4
B) 107.0
C) 117.5
D) 128.8
Answer: D Difficulty: Medium Goal: 3

69. What is Laspeyres' price index?

A) 98.4
B) 107.0
C) 108.0
D) 117.5
Answer: A Difficulty: Medium Goal: 3

70. What is Paasche's price index?

A) 98.4
B) 107.0
C) 108.0
D) 117.5
Answer: B Difficulty: Medium Goal: 3

71. What is the value index?

A) 110.3
B) 115.6
C) 108.0
D) 118.5
Answer: B Difficulty: Medium Goal: 3

72. What is the average of Laspeyres' and Paasche's price indexes (Fisher Index)?
A) 107.5

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B) 102.7
C) 112.8
D) 103.2
Answer: B Difficulty: Medium Goal: 3

73. What is the interpretation of the value index?

A) Value rose 28.8%
B) Value rose 15.6%
C) Value rose 17.5%
D) Value rose 20.0%
Answer: B Difficulty: Medium Goal: 3

74. What is your interpretation of Laspeyres' price index?

A) Prices rose 98.4%
B) Prices declined 1.6%
C) Prices rose 7.0%
D) Prices rose 8.0%
Answer: B Difficulty: Medium Goal: 3

Fill-in-the-Blank

75. What is the simple price relative for peas? _______

Answer: 90.0 Difficulty: Medium Goal: 2

76. What is the simple price relative for broccoli? _______

Answer: 166.7 Difficulty: Medium Goal: 2 AACSB: AS

77. What is the simple price relative for cabbage? _______

Answer: 83.3 Difficulty: Medium Goal: 2

78. What is the simple price relative for carrots? _______

Answer: 120.0 Difficulty: Medium Goal: 2

Use the following to answer questions 79-83:

Suppose your annual 2001 salary was $40,000 and your 2006 salary was $52,000. Assume the annual
CPI rose from 177.1 to 202.9 during this period of time.

79. What was your real income in 2001? _______

Answer: $22,586 Difficulty: Medium Goal: 6

13 Test Bank, Chapter 15

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80. What was you real income in 2006? _______
Answer: $25,628 Difficulty: Medium Goal: 6 AACSB: AS

81. What was the purchasing power of the dollar in 2006? _______
Answer: $0.493 Difficulty: Medium Goal: 6

82. What was the purchasing power of the dollar in 2001? _______
Answer: $0.565 Difficulty: Medium Goal: 6

83. In which year was your "real" income larger? ________

Answer: 2006 Difficulty: Medium Goal: 6

84. What is the purpose of an index?_____________________________________

Answer: The purpose of an index is express changes over time as a percent.
Difficulty: Medium Goal: 1 AACSB: CA

85. What do most indexes have in common? ________________________________

Answer: a base period and a current period. Difficulty: Medium Goal: 1

86. In a weighted index, what variable is usually the weight? ________________________

Answer: quantity: Difficulty: Medium Goal: 2

15 Test Bank, Chapter 15