Deck 6: Measuring the Cost of Living

Question 1

Refer to Table 6-1. Suppose that the typical consumer basket consists of 5 bushels of peaches and 10 bushels of apples and that the base year is 2018. What is the consumer price index for 2019?

A) 80
B) 100
C) 120
D) 125

Answer 1

125

Question 2

How are the weights on the various goods and services in the CPI basket determined?

A) Each good and service is weighted according to its quantity.
B) A survey is conducted to determine how much of each good and service typical consumers purchase.
C) The weights equal the ratio of expenditures on each good or service divided by the total consumption expenditures in the GDP accounts.
D) Each good and service is weighted according to its price.

Answer 2

A survey is conducted to determine how much of each good and service typical consumers purchase.

Question 3

Which agency calculates the CPI?

A) the Canadian Bureau of Labour Statistics
B) the Department of Consumer Affairs
C) Statistics Canada
D) the Bank of Canada

Answer 3

Statistics Canada

Question 4

Which goods are supposed to be included in the CPI?

A) all goods and services produced in the economy
B) all goods and services that typical consumers buy
C) all goods and services in the consumption component of the GDP accounts
D) all the goods, but not the services, in the consumption component of the GDP accounts

Question 5

In the CPI, how are goods and services weighted?

A) according to how much consumers buy of each item
B) according to whether the goods and services are necessities or luxuries
C) according to the levels of production of the goods and services in the domestic economy
D) according to the expenditures on them in the GDP national income accounts

Question 6

What best defines the inflation rate?

A) the price level
B) the change in the price level
C) the price level divided by the price level in the previous period
D) the percentage change in the price level from the previous period

Question 7

Babe Ruth, the famous baseball player, earned $80,000 in 1931. Today, the best baseball players can earn 200 times as much as Babe Ruth in 1931. Are the best baseball players better off than Babe Ruth?

A) Yes, the best baseball players today are better off than Babe Ruth was in 1931 because they earn much more.
B) No, because prices have also risen.
C) It cannot be determined because one cannot make judgments about changes in the standard of living based on changes in prices and changes in incomes.
D) It cannot be determined without additional information regarding increases in prices since 1931.

Question 8

Refer to Table 6-2. Suppose that the basket of goods in the CPI consisted of 3 units of pork and 4 units of corn. What is the inflation rate for 2019?

A) 4.76 percent
B) 25.00 percent
C) 40.00 percent
D) 41.18 percent

Question 9

Refer to Table 6-2. Suppose that the basket of goods in the CPI consisted of 3 units of pork and 4 units of corn. What is the consumer price index for 2019 if the base year is 2018?

A) 70.83
B) 120.00
C) 141.18
D) 312.50

Question 10

How often is the CPI calculated?

A) weekly
B) monthly
C) quarterly
D) yearly

Question 11

Which of the following is the consumer price index used for?

A) to track changes in the level of wholesale prices in the economy
B) to monitor changes in the cost of living
C) to monitor changes in the level of real GDP
D) to track changes in the stock market

Question 12

Refer to Table 6-1. What was the inflation rate in 2019?

A) 20 percent
B) 25 percent
C) 30 percent
D) 80 percent

Question 13

Which of the following is the consumer price index used for?

A) to differentiate between gross national product and gross domestic product
B) to turn dollar figures into meaningful measures of purchasing power
C) to characterize the types of goods and services that consumers purchase
D) to measure the quantity of goods and services that the economy produces

Question 14

What does the CPI measure?

A) the overall price of inputs purchased by a typical producer
B) the overall price of goods and services bought by a typical consumer
C) the overall price of goods and services produced in the economy
D) the overall price of shares on the Toronto Stock Exchange

Question 15

Refer to Table 6-1. Suppose that the typical consumer basket consists of 5 bushels of peaches and 10 bushels of apples and that the base year is 2018. What is the consumer price index for 2018?

A) 80
B) 100
C) 120
D) 125

Question 16

When the overall level of prices in the economy is increasing, what is the economy experiencing?

A) economic growth
B) inflation
C) unemployment
D) deflation

Question 17

How does a rise in the consumer price index affect a typical family?

A) The typical family has to spend more dollars to maintain the same standard of living.
B) The typical family can spend fewer dollars to maintain the same standard of living.
C) The typical family finds that its standard of living is not affected.
D) The typical family can offset the effects of rising prices by saving more.

Question 18

What is the basket of goods used to construct the CPI?

A) a random sample of all goods and services produced in the economy
B) the goods and services typically bought by consumers, according to Statistics Canada surveys
C) goods and services weighted by the ratio of expenditures on them relative to the consumption component of GDP
D) the average price of goods and services in each major category of consumer expenditures

Question 19

Which situation is described by the term "inflation"?

A) The overall level of prices in the economy is increasing.
B) Incomes in the economy are increasing.
C) Stock market prices are rising.
D) Nominal interest rates in the economy are rising.

Question 20

In sequence, what are the steps involved in calculating the consumer price index and the inflation rate?

A) Choose a base year, determine the basket, compute the index, compute the basket's cost, and compute the inflation rate.
B) Choose a base year, find the prices, determine the basket, compute the basket's cost, and compute the inflation rate.
C) Determine the basket, find the prices, compute the basket's cost, choose a base year and compute the index, and compute the inflation rate.
D) Determine the basket, find the prices, compute the index, choose a base year, and compute the inflation rate.

Question 21

For the CPI, what is the base year?

A) It is the benchmark against which other years are compared, and it changes each year.
B) It is the benchmark against which other years are compared, and it changes occasionally.
C) It is the year the CPI first appeared.
D) It is the year prior to the year for which the CPI is calculated.

Question 22

Which change in the price index shows the greatest rate of inflation?

A) 80 to 100
B) 100 to 120
C) 150 to 170
D) 200 to 220

Question 23

The price index in the first year is 120, in the second year is 150, and in the third year is 180. What is the inflation rate between the first and second year and between the second and third year?

A) 20 percent between the first and second year, 33 percent between the second and third year
B) 25 percent between the first and second year, 20 percent between the second and third year
C) 25 percent between the first and second year, 50 percent between the second and third year
D) 30 percent between the first and second year, 30 percent between the second and third year

Question 24

From October 2018 to October 2019, the CPI in country A rose from 116.5 to 119.8. In country B, it rose from 97.2 to 102.3. What were the inflation rates in the two countries?

A) 3.3 percent in A and 6.7 percent in B
B) 3.3 percent in A and 5.2 percent in B
C) 2.8 percent in A and 6.7 percent in B
D) 2.8 percent in A and 5.2 percent in B

Question 25

If the consumer price index was 100 in the base year and 112 the following year, what was the inflation rate?

A) 1.2 percent
B) 11.2 percent
C) 12 percent
D) 112 percent

Question 26

The price index is 320 in one year and 380 in the next. What was the inflation rate?

A) 6.7 percent
B) 8.8 percent
C) 12.5 percent
D) 18.8 percent

Question 27

Refer to Table 6-3. What was the inflation rate, as measured by the CPI, between 2017 and 2018?

A) 27.9 percent
B) 34.1 percent
C) 47.0 percent
D) 48.5 percent

Question 28

If the price index in the first year was 80, in the second year was 100, and in the third year was 90, what did the economy experience?

A) 20 percent inflation between the first and second years and 10 percent inflation between the second and third years
B) 20 percent inflation between the first and second years and 10 percent deflation between the second and third years
C) 25 percent inflation between the first and second years and 10 percent inflation between the second and third years
D) 25 percent inflation between the first and second years and 10 percent deflation between the second and third years

Question 29

The price index in 2018 is 130, and in 2019 it is 143. What is the inflation rate?

A) 1.01 percent
B) 10 percent
C) 13 percent
D) 43 percent

Question 30

For any given year, what is the CPI?

A) the price of the basket of goods and services in the given year divided by the price of the basket in the base year, then multiplied by 100
B) the price of the basket of goods and services in the given year divided by the price of the basket in the previous year, then multiplied by 100
C) the price of the basket of goods and services in the base year divided by the price of the basket in the given year, then multiplied by 100
D) the price of the basket of goods and services in the previous year divided by the price of the basket in the given year, then multiplied by 100

Question 31

Refer to Table 6-3. What was the inflation rate, as measured by the CPI, between 2016 and 2017?

A) -4.44 percent
B) -7.14 percent
C) 3.75 percent
D) 11.25 percent

Question 32

The market basket used to calculate the CPI in Aquilonia is: four loaves of bread
Six litres of milk,
Two shirts, and
Two pairs of pants.
Last year,
The price of bread was $1.00 per loaf,
The price of milk was $1.50 per litre,
The price of a shirt was $6.00, and
The price of a pair of pants was $10.00.
This year,
The price of bread is $1.50 per loaf,
The price of milk is $2.00 per litre,
The price of a shirt is $7.50, and
The price of a pair of pants is $13.00.
What is the inflation rate, as measured by the CPI, for Aquilonia between last year and this year?

A) 20.00 percent
B) 24.4 percent
C) 30.00 percent
D) 35.56 percent

Question 33

Which change in the price index shows the greatest rate of inflation?

A) 100 to 115
B) 150 to 180
C) 180 to 210
D) 220 to 255

Question 34

The price index in the first year is 100, in the second year is 90, and in the third year is 80. What is the deflation rate between the first and second year, and between the second and third year?

A) 11 percent between the first and second year, 11 percent between the second and third year
B) 11 percent between the first and second year, 12 percent between the second and third year
C) 10 percent between the first and second year, 11 percent between the second and third year
D) 10 percent between the first and second year, 12 percent between the second and third year

Question 35

The price index is 180 in one year and 210 in the next. What is the inflation rate?

A) 11percent
B) 14.3 percent
C) 16.7 percent
D) 30 percent

Question 36

How is the inflation rate calculated?

A) by surveying consumer spending
B) by adding up the price increases of all goods and services
C) by computing a simple average of the price increase in all goods and services
D) by determining the percentage increase in the price index from the preceding period

Question 37

The price index is 260 in one year and 300 in the next. What is the inflation rate?

A) 1.0 percent
B) 9.3 percent
C) 12 percent
D) 15.3 percent

Question 38

Refer to Table 6-3. What was the inflation rate, as measured by the CPI, between 2018 and 2019?

A) 36.36 percent
B) 55.4 percent
C) 77.8 percent
D) 140.2 percent

Question 39

Which price changes when an inflation rate is calculated using the CPI?

A) all prices
B) the prices of all final goods and services
C) the prices of all consumer goods
D) the prices of some consumer goods

Question 40

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

A) Most goods have become more expensive.
B) The price level has increased.
C) The inflation rate has increased.
D) Some goods have become cheaper.

Question 41

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

A) 5.3 percent
B) 9.4 percent
C) 11.0 percent
D) 16.2 percent

Question 42

Refer to Table 6-5. Using 2017 as the base year, what is the consumer price index?

A) 100 in 2017, 135 in 2018, and 155 in 2019
B) 100 in 2017, 270 in 2018, and 310 in 2019
C) 200 in 2017, 270 in 2018, and 310 in 2019
D) 200 in 2017, 540 in 2018, and 620 in 2019

Question 43

Refer to Table 6-5. Using 2019 as the base year, what is the consumer price index?

A) 52.66 in 2017, 84.25 in 2018, and 106.50 in 2019
B) 64.52 in 2017, 87.10 in 2018, and 100.00 in 2019
C) 52.66 in 2017, 90.89 in 2018, and 100.00 in 2019
D) 100.00 in 2017, 135.00 in 2018, and 155.00 in 2019

Question 44

Refer to Table 6-4. Among these categories, what was the highest rate of inflation?

A) 3.1 percent
B) 3.9 percent
C) 5.2 percent
D) 6.6 percent

Question 45

Which of the following is by far the largest category of goods and services in the CPI basket?

A) shelter
B) clothing and footwear
C) household operations and furnishings
D) food

Question 46

What are the categories of Canadian consumer spending, ranked from largest to smallest?

A) food, alcoholic beverages and tobacco products, shelter, transportation, and health and personal care
B) food, health and personal care, shelter, alcoholic beverages and tobacco products, and transportation
C) shelter, food, alcoholic beverages and tobacco products, transportation, and health and personal care
D) shelter, transportation, food, health and personal care, and alcoholic beverages and tobacco products

Question 47

From one year to the next, the CPI for medical care rose from 261.8 to 275.8. What was the inflation rate for medical care?

A) 4.9 percent
B) 5.35 percent
C) 11.1 percent
D) 12.0 percent

Question 48

What is the goal of the consumer price index?

A) to measure changes in the costs of production
B) to measure changes in the cost of living
C) to measure changes in the relative prices of consumer goods
D) to measure changes in the production of consumer goods

Question 49

Which of the following is NOT a widely acknowledged problem with the CPI as a measure of the cost of living?

A) substitution bias
B) introduction of new goods
C) unmeasured quality change
D) unmeasured wage changes

Question 50

What does "substitution bias" in the consumer price index refer to?

A) replacing old goods with new goods in consumer purchases
B) replacing low-quality goods with high-quality goods in consumer purchases
C) replacing expensive goods with cheaper goods in consumer purchases
D) replacing old technology goods with new technology goods in consumer purchases

Question 51

Which of the following is NOT included in the rate of core inflation?

A) all foreign-produced goods
B) any good that makes up less than 10 percent of the CPI basket of goods
C) the most volatile components from the CPI basket of goods and services
D) the least volatile components from the CPI basket of goods and services

Question 52

If the cost of shelter increases by 10 percent, then, other things the same, how much is the CPI likely to increase?

A) by about 1 percent
B) by about 3 percent
C) by about 7 percent
D) by about 10 percent

Question 53

If the cost of transportation and the cost of food both increase by 25 percent, then, other things the same, how much is the CPI likely to increase?

A) by about 3 percent
B) by about 6 percent
C) by about 8 percent
D) by about 11 percent

Question 54

Refer to Table 6-5. Using 2018 as the base year, what is the consumer price index in 2017?

A) 74.07
B) 77.78
C) 78.22
D) 135.00

Question 55

For the average Canadian consumer, what percentage of total consumption does shelter and food expenditures make up, respectively?

A) 27.2, 16.2
B) 14.1, 17.5
C) 19.3, 18.1
D) 16.6, 19.7

Question 56

If the cost of health and personal care increases by 20 percent, then, other things the same, how much is the CPI likely to increase?

A) by about 1 percent
B) by about 2 percent
C) by about 3 percent
D) by about 4 percent

Question 57

Which statement best characterizes the consumer price index?

A) It is a measure of a nation's standard of living.
B) It shows production of consumer goods.
C) It measures the increase in the prices of all final goods and services produced within the borders of a country.
D) It is an imperfect measure of the cost of living.

Question 58

Which of the following makes up the smallest category of consumer spending in Canada?

A) food
B) transportation
C) alcoholic beverages and tobacco products
D) shelter

Question 59

Refer to Table 6-4. Of those categories, which one had the lowest rate of inflation?

A) food and beverages
B) housing
C) gasoline
D) transportation

Question 60

Refer to Table 6-5. Using 2017 as the base year, what is the inflation rate?

A) 13.3 percent for 2018 and 14.8 percent for 2019
B) 13.3 percent for 2018 and 55.0 percent for 2019
C) 35.0 percent for 2018 and 14.8 percent for 2019
D) 35.0 percent for 2018 and 55.0 percent for 2019

Question 61

Suppose OPEC succeeds in raising world oil prices by 300 percent. This price increase causes inventors to look at alternative sources of fuel for internal-combustion engines. A hydrogen-powered engine is developed, and it is cheaper to operate than gasoline engines. Which problem in the construction of the CPI would this situation represent, respectively?

A) substitution bias and introduction of new goods
B) introduction of new goods and unmeasured quality change
C) unmeasured quality change and introduction of new goods
D) income bias and substitution bias

Question 62

When the quality of a good deteriorates, what happens to the purchasing power of the dollar?

A) It increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
B) It increases, so the CPI understates the change in the cost of living if the quality change is not accounted for.
C) It decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
D) It decreases, so the CPI understates the change in the cost of living if the quality change is not accounted for.

Question 63

Geoff goes to the grocery store to make his monthly purchase of coffee. As he enters the beverage section, he notices that the price of coffee has been raised by 15 percent, so he decides to buy some tea instead. Which problem in the construction of the CPI is this situation most relevant to?

A) substitution bias
B) introduction of new goods
C) unmeasured quality change
D) income effect

Question 64

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?

A) 0.5 percentage points
B) 1.6 percentage points
C) 2.1 percentage points
D) 3.4 percentage points

Question 65

Suppose the price of a container of strawberries rises from $2 to $2.50 and the price of a bag of apples rises from $4 to $5. If the CPI rises from 150 to 175, what will people likely buy?

A) more strawberries and more apples
B) more strawberries and fewer apples
C) less strawberries and more apples
D) less strawberries and fewer apples

Question 66

Suppose the quality of lap-top computers, which are part of the CPI basket, has improved, while their price has remained the same. If Statistics Canada wants to adjust the CPI so that the effect of better quality on the cost of living is accounted for, what should Statistics Canada do?

A) It should keep the CPI unchanged, because the price has not changed.
B) It should decrease the CPI, because better quality means lower maintenance costs.
C) It should increase the CPI, because higher quality means higher value.
D) It should keep the CPI unchanged, because lower maintenance costs are offset by higher value.

Question 67

Why are measurement problems in the consumer price index as an indicator of the cost of living important?

A) because high rates of inflation cause voters to become unhappy
B) because politicians have manipulated the measurement problems to their advantage
C) because many businesses and government programs use the CPI to make adjustments to wages and benefit payments
D) because if the price level is overstated, consumers will be taken advantage of by sellers of consumer goods

Question 68

Which problem in the construction of the CPI is the invention of wi-fi most relevant to?

A) substitution bias
B) introduction of new goods
C) unmeasured quality change
D) income bias

Question 69

Consumers begin purchasing houses incorporating steel studs instead of wooden studs after the price of lumber increases. Which problem in the construction of the CPI does this situation best represent?

A) substitution bias
B) introduction of new goods
C) unmeasured quality change
D) income bias

Question 70

When the relative price of a good increases, how will consumers respond?

A) by buying more of it and its substitutes
B) by buying less of it and its substitutes
C) by buying less of it and more of its substitutes
D) by buying more of it and less of its substitutes

Question 71

Suppose that dairy products have risen in price less than prices in general over the past several years. Which problem in the construction of the CPI is this price increase most relevant to?

A) substitution bias
B) introduction of new goods
C) unmeasured quality change
D) income bias

Question 72

Which problem in the construction of the CPI is the creation of the mobile phone most relevant to?

A) substitution bias
B) introduction of new goods
C) unmeasured quality change
D) income bias

Question 73

When the quality of a good improves, what happens to the purchasing power of the dollar?

A) It increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
B) It increases, so the CPI understates the change in the cost of living if the quality change is not accounted for.
C) It decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
D) It decreases, so the CPI understates the change in the cost of living if the quality change is not accounted for.

Question 74

Suppose the price of a carton of ice cream rises from $4 to $5 and the price of coffee rises from $2 to $2.50. If the CPI rises from 150 to 200, what will people likely buy?

A) more ice cream and more coffee
B) more ice cream and less coffee
C) less ice cream and more coffee
D) less ice cream and less coffee

Question 75

Rebecca bought a cell phone for $500. A year later, Rebecca's twin sister Rachel bought an upgraded version of the same phone for $500. Which problem in the construction of the CPI does this situation best represent?

A) substitution bias
B) unmeasured quality change
C) introduction of new goods
D) income bias

Question 76

In recent years, there have been increases in the size of golf club drivers and the methods and materials used for making them have improved. Which problem in the construction of the CPI is this change in drivers most relevant to?

A) substitution bias
B) introduction of new goods
C) unmeasured quality change
D) income bias

Question 77

By not taking into account the possibility of consumer substitution, how is the CPI biased?

A) It understates the cost of living because people buy more of the newer goods.
B) It overstates the cost of living because people buy more of the cheaper goods.
C) It understates the cost of living because people have higher incomes and perceive some goods as inferior.
D) It overstates the cost of living because people have higher incomes and perceive formerly luxury goods as necessities.

Question 78

What do economists believe about the bias in the CPI as a measure of the cost of living?

A) Economists agree that the bias in the CPI is a very serious problem.
B) There is still debate among economists on whether CPI understates or overstates increases in the cost of living.
C) Economists agree on the severity of the CPI bias, but there is still debate on what to do about it.
D) There is still debate among economists on the severity of the CPI bias and what to do about it.

Question 79

Because the CPI is based on a fixed basket of goods, the introduction of new goods and services in the economy causes the CPI to overestimate the cost of living. Why is this?

A) because new goods and services are always of higher quality than existing goods and services
B) because new goods and services have better product warranties than existing goods and services
C) because new goods and services cost more than existing goods and services
D) because when a new good is introduced, it gives consumers greater choice, thus reducing the amount they must spend to maintain their standard of living

Question 80

What does the GDP deflator reflect?

A) the level of prices in the base year relative to the current level of prices
B) the current level of prices relative to the level of prices in the base year
C) the level of real output in the base year relative to the current level of real output
D) the current level of real output relative to the level of real output in the base year