Exam 6: Measuring the Cost of Living

Suppose an economy produces and consumes only two goods: houses and entertainment.The following table shows quantities consumed and prices for three years: Year 0 (the base year),Year 1,and Year 2. Item Year 0 Year 1 Year 2 Quantity (units) Price ($ / unit) Quantity (units) Price ($ / unit) Quantity (units) Price ($ / unit) Food 1000 280 900 295 1050 297 Entertainment 700 24 780 25 785 25 a)Using the base year basket,compute the CPI for Year 1 and Year 2. b)Compute the GDP deflator for Year 1 and Year 2. c)Compute inflation rates based on CPI and the GDP deflators.

In 1990,Professor Fellswoop made $12,000,in 2000 he earned $24,000,and in 2015 he earned $36,000.If the CPI was 40 in 1990,60 in 2000,and 100 in 2015,then in real terms,when was Professor Fellswoop's salary highest and lowest?

Table 6-5 This table pertains to an economy with only two goods: books and calculators.The fixed basket consists of 5 books and 10 calculators. -Refer to the Table 6-5.Using 2015 as the base year,what is the consumer price index?

Five years ago,when you took up your current job,your wage was $20 an hour.Now it is $22.Suppose you do not know the CPIs,but only the inflation rates for the past 5 years: 2.5,1.9,2.2,2.7,and 3.1 percent. a)In real terms,do you now earn more or less than 5 years ago? b)How much was the inflation rate over the 5-year period? c)If the CPI was 112.5 in the first year,how much is it today?

How often is the CPI calculated?

The Bank of Canada regularly announces the inflation rate.Many economic aspects,such as employment,wages,loans,interest rates,and business contracts are influenced by the announced inflation rate.Thus,the way the inflation rate is determined has important consequences on many people's lives.Let us construct a very simplified economic model to illustrate the implications of changing the composition of the CPI basket,which in turn determines how the inflation rate is calculated. Think of an economy consisting of two people,Betty and Trent.They only consume books and food: Betty receives meals for free from a foreign admirer,and she only buys 20 books a week for the price of $4 apiece.Trent has no time to read,so that he buys 14 meals a week for the price of $10 apiece. a)Calculate Betty and Trent's expenditures and their total expenditure. b)Suppose the price of meals increases by 10 percent,to $11.Calculate the CPI inflation rate,and compare the increases in expenditures implied by this rate with the actual increases in expenditures for each individual. c)Suppose the government wishes to compensate consumers for the increase in prices by an amount determined by the CPI inflation.Who benefits more by this compensation,Betty or Trent?

If this year the CPI is 125 and last year it was 120,what do we know?

An economy only consumes two goods: food and recreation.The current shares in total expenditure are 60 percent food and 40 percent recreation.Suppose the price of food increases by 4 percent and the price of recreation increases by 2 percent.What is the change in the CPI?

Suppose that the CPI is currently 300 and was 50 in 1950.Then,according to the CPI,$1 in 1950 purchased the same amount of goods and services as what amount today?

How do the GDP deflator and the consumer price index compare to each other?

Suppose the price of android tablets increases dramatically,causing a 1 percent increase in the CPI.By how much will the GDP deflator most likely increase?

Suppose the average price of gas in 2014 was $0.95 per litre and $0.97 in 2015.The inflation rate was 3 percent in 2015.What was the 2015 price of gas in 2014 dollars?

In 1972 in Sarnia,Ontario,one could buy a bag of chips,a pound of hamburger,a package of buns,and a small bag of charcoal for about $2.50.If the same goods today cost about $6.00,which set of CPIs represents the same purchasing power for the cost in 1972 and the cost today?

How often does the basket of goods in the consumer price index change?

For the average Canadian consumer,what percentage of spending does food make up?

In the country of Hyrkania,the CPI in 2014 was 140 and the CPI in 2015 was 154.Jake,a resident of Hyrkania,borrowed money in 2014 and repaid the loan in 2015.If the nominal interest rate on the loan was 14 percent,what was the real interest rate?

The Canadian income tax system is indexed to the CPI.

Research done at the Bank of Canada suggests that the sources of bias in CPI,taken together,cause the Canadian CPI to overstate increases in the cost of living.How much does the research indicate it is overstated by?

If the nominal interest rate is 5 percent and the inflation rate is 2 percent,then the real interest rate is 3 percent.

The inflation rate is computed as 100 × (the current year CPI - the CPI of the previous year)÷ the CPI of the previous year.