Deck 7: The Cpi and the Cost of Living

Question 1

The formula for the CPI is

A) (Cost of CPI market basket at current period prices ÷ Cost of CPI market basket at next year's prices) × 100.
B) (Cost of CPI market basket at current period prices ÷ Cost of CPI market basket at base period prices) × 100.
C) (Cost of CPI market basket this year × Cost of CPI market basket at base period prices) ÷ 100.
D) (Cost of CPI market basket at base period prices ÷ Cost of CPI market basket at current period prices) × 100.
E) (Cost of CPI market basket this year × Cost of CPI market basket at base period prices) × 100.

Answer 1

(Cost of CPI market basket at current period prices ÷ Cost of CPI market basket at base period prices) × 100.

Question 2

Based on the table above, the CPI for 2018 is

A) 98.5.
B) 102.5.
C) 105.1.
D) 100.
E) 5.0 per cent.

Answer 2

100.

Question 3

The data in the table above show the consumption by families in a small (poor) economy. The families consume only salt and bread. The reference base period is 2011. The CPI in 2011 is

A) 94.2.
B) 124.
C) 106.2.
D) 100.
E) 140.5.

Answer 3

100.

Question 4

The data in the table above show the consumption by families in a small (poor) economy. The families consume only salt and bread. The reference base period is 2011. The inflation rate between 2011 and 2012 was

A) 23.1 per cent.
B) 18.8 per cent.
C) 52.5 per cent.
D) 118.8 per cent.
E) 123.1 per cent.

Question 5

To find the cost of the CPI market basket in the base period prices we have to multiply the

A) current period quantities in the CPI market basket by the current period prices.
B) quantities in the CPI market basket by the base period prices.
C) current period quantities in the CPI market basket by the base period prices.
D) quantities in the CPI market basket by the current period prices.
E) quantities in the CPI market basket by the base period prices and then multiply by 100.

Question 6

The Consumer Price Index market basket contains

A) Australian-produced goods and services purchased by an average urban household.
B) the minimal dietary requirements of an average urban household.
C) the ideal calorie intake of each member of an average urban household.
D) the goods and services that the economists working for the ABS believe consumers should buy.
E) the goods and services purchased by an average urban household.

Question 7

The reference base period for the CPI has an index number of

A) 1.
B) 0.
C) 100.
D) 10.
E) 1,000.

Question 8

Based on the table above, the cost of the base period market basket in the base period is

A) $4,885.
B) $4,650.
C) $21.00.
D) $3,300.
E) $3,250.

Question 9

What good or service is given the most weight in the CPI?

A) Transportation
B) Housing
C) Clothing
D) Recreation
E) Food and beverages

Question 10

The Consumer Price Index measures the average prices paid by

A) businesses for the most frequently used basket of resources.
B) urban consumers for the goods and services that most frequently change in price.
C) urban consumers for a fixed market basket of goods and services.
D) businesses for a fixed market basket of resources.
E) businesses and consumers for a market basket of goods and services.

Question 11

Suppose that last year the price of strawberries was $2 and the price of milk was $1. This year, the price of milk is $2 and the price of strawberries is $1. Which of the following statements is true?

A) The CPI increases because milk is more expensive.
B) The change in the CPI depends on how the market basket changed between the two years.
C) The CPI might increase or decrease depending on the quantities in the CPI market basket.
D) The CPI does not change because the change in the two prices is the same.
E) The CPI decreases because strawberries are cheaper.

Question 12

Based on the table above, the cost of the base period market basket in 2018 is

A) $4,885.
B) $4,650.
C) $3,300.
D) $3,885.
E) None of the above answers is correct.

Question 13

The CPI market basket

A) determines how the spending patterns of the average urban household change from month to month.
B) determines how spending patterns change from urban household to urban household.
C) changes from one month to the next in order to calculate the CPI.
D) weights the goods and services according to the budget of an average urban household.
E) determines the best possible way of taxing the average urban household.

Question 14

Constructing the CPI involves which of the following stages?
i. Conducting the quarterly price survey
ii. Converting the CPI to an international index
iii. Selecting the CPI market basket

A) i only
B) ii only
C) iii only
D) i and iii
E) i, ii and iii

Question 15

The table above gives the CPI for a nation. Based on the table, we can determine that the reference base period is

A) 2002.
B) 1998-2000.
C) 1994.
D) 1996.
E) More information about when the Consumer Expenditure Survey was undertaken is needed to answer the question.

Question 16

Which of the following changes would have the largest impact on the CPI?

A) A one per cent increase in the cost of education.
B) A one per cent increase in the cost of medical care.
C) A one per cent increase in the cost of housing.
D) A one per cent increase in the cost of transportation.
E) A one per cent increase in the cost of clothing.

Question 17

The CPI is a measure of the

A) average prices of all goods and services produced.
B) average change in the output of the goods and services purchased by a typical urban consumer.
C) average prices of all goods.
D) average prices paid by consumers for a fixed basket of goods and services.
E) percentage change in the price level.

Question 18

If the cost of the CPI market basket at current period prices is $275 and the cost of the CPI market basket at base period prices is $350, the CPI is

A) 100.
B) 350.
C) 275.
D) 127.
E) 79.

Question 19

The data in the table above show the consumption by families in a small (poor) economy. The families consume only salt and bread. The reference base period is 2011. The CPI in 2012 is

A) 100.
B) 18.8
C) 118.8
D) 23.1
E) 123.1

Question 20

The CPI market basket is determined by

A) surveys asking large retail companies, such as Kmart, about their sales of consumer goods and services.
B) profit releases of the largest companies.
C) a household survey.
D) supermarket purchases recorded by scanner technology.
E) tax return data of households.

Question 21

Based on the table above, between 2018 and 2019, the inflation rate in this country was

A) 98.5 per cent.
B) 105.1 per cent.
C) -1.5 per cent.
D) -2.5 per cent.
E) 2.5 per cent.

Question 22

The bias in the CPI distorts private contracts because

A) a worker that links her salary to the CPI is likely to be worse off than a worker that doesn't link her salary to the CPI.
B) a lender that links the interest payments on the loan to the CPI is likely to be worse off than a lender that does not link the interest payments on the loan to the CPI.
C) a future payment that is linked to the CPI is likely to be raised above the true increase in the price level.
D) a future increase in a payment that is linked to the CPI is likely to be less than the true increase in the price level.
E) the CPI cannot properly account for what goods and services a typical urban consumer buys.

Question 23

Which of the following makes the Consumer Price Index a less accurate measure of the cost of living?
i. The monthly price survey conducted to collect information about prices is very unreliable.
ii. The existence of a new goods bias in the calculation of the CPI.
iii. The existence of a quality change bias in the calculation of the CPI.

A) i only
B) ii only
C) i and ii
D) ii and iii
E) i, ii and iii

Question 24

Suppose higher prices lead consumers to switch from shopping at Myers to shopping at Target. If the CPI does not reflect this change, it is referred to as

A) a new price bias.
B) a quality change bias.
C) an outlet substitution bias.
D) a new goods bias.
E) store bias.

Question 25

Mark has a two-year wage contract with his employer. Mark's wage contract specifies a $50,000 salary for the first year, and a salary increase equal to the percentage increase in the CPI during the second year. The percentage increase in the CPI during the year was 4.0 percentage points. If the CPI overstates inflation by 1.0 percentage point, at the end of the first year Mark's salary increased by ________ more than it would have without the upward bias.

A) $500
B) $1500
C) $50
D) $3000
E) $2000

Question 26

The bias in the CPI affects government outlays because the overstatement of inflation

A) increases government outlays by more than what is justified.
B) means that tax receipts are less than what is needed to cover government outlays.
C) decreases government outlays by more than what is justified.
D) decreases social welfare benefits.
E) increases fiscal pressure.

Question 27

The outlet substitution bias is most likely to put ________ and so ________ the inflation rate.

A) an upward bias into the CPI; understate
B) a downward bias into the CPI; overstate
C) a downward bias into the CPI; understate
D) an upward bias into the CPI; overstate
E) no bias into the CPI because it is such a small effect; have no effect on

Question 28

In the current year, the CPI is 122 and during the previous year the CPI was 115. The inflation rate between these years is

A) 5.7 per cent.
B) -6.1 per cent.
C) 1.61 per cent.
D) 6.1 per cent.
E) -5.7 per cent.

Question 29

If the current period has a CPI of 143, then the amount of inflation since the base period is

A) unknown without knowing the base period's CPI.
B) 143 per cent.
C) 57 per cent.
D) 43 per cent.
E) 157 per cent.

Question 30

Which of the following formulas is used to calculate the inflation rate?

A) inflation rate = 100 ×
B) inflation rate = 100 ×
C) Inflation rate = 100 ×
D) Inflation rate = 100 ×
E) Inflation rate = 100 ×

Question 31

A country's CPI was 84.5 last year and 100.0 this year. The inflation rate was

A) 18.3 per cent.
B) 15.5 per cent.
C) 7.29 per cent.
D) -18 per cent.
E) 84.5 per cent.

Question 32

The quality change bias is most likely to put ________ into the CPI and so ________ the inflation rate.

A) a downward bias; overstate
B) a random bias; randomly overstate or understate
C) a downward bias; understate
D) an upward bias; understate
E) an upward bias; overstate

Question 33

If we compare the CPI to a perfect cost of living index, we find that they are

A) the same thing.
B) different because the CPI uses a fixed basket and has some measurement difficulties.
C) different because the cost of living has nothing to do with prices.
D) different because the CPI does not measure prices.
E) not the same because the CPI has a fixed reference base period.

Question 34

The commodity substitution bias is most likely to put ________ into the CPI and so ________ the inflation rate.

A) an upward bias; understate
B) a random bias; randomly overstate or understate
C) a downward bias; understate
D) an upward bias; overstate
E) a downward bias; overstate

Question 35

Based on the table above, the CPI for 2019 is

A) 102.5.
B) 105.1.
C) 5.0 per cent.
D) 98.5.
E) 100.

Question 36

In Australia during the 1990s and 2000s, the inflation rate

A) only decreased during the late 1990s.
B) was high and the price level was rising slowly.
C) was low and the price level was rising slowly.
D) was relatively constant at approximately 8 per cent to 12 per cent per year.
E) increased every year.

Question 37

A country reports the total expenditures on the fixed CPI basket for the past three years. The cost of the CPI basket in 2016 was $23,000, the cost of the CPI basket for the reference base period, 2017, was $23,805, and the cost of the CPI basket in 2018 was $24,500. The CPI for 2018 is

A) 245.0.
B) 97.2.
C) 106.5.
D) 102.9.
E) 93.9.

Question 38

For the purpose of measuring the cost of living for consumers, one reason the GDP deflator is NOT a good substitute for the CPI is because it

A) compares current year prices with base year prices.
B) has a larger bias than does the CPI.
C) compares a current year basket of goods with a base year basket of goods.
D) and the CPI move in the same direction over time.
E) includes the prices of exported goods, which are not consumed in Australia.

Question 39

When the price of broccoli increases relative to cauliflower, people who buy fresh vegetables respond by buying more cauliflower and less broccoli. As a result, the CPI has

A) a new price bias.
B) a new goods bias.
C) an outlet substitution bias.
D) a quality change bias.
E) a commodity substitution bias.

Question 40

If the CPI is used as a cost of living index, incomes that are adjusted to reflect the changes in the CPI will

A) decrease by more than the actual change in the cost of living.
B) decrease by more than the actual change in quantities.
C) increase by more than the actual change in the cost of living.
D) increase by more than the actual change in quantities.
E) generally rise by about 2 per cent a year because the standard of living generally rises by about 2 per cent a year.

Question 41

Suppose the CPI in 1983 is 100 and the CPI this year is 172. These values for the CPI mean that

A) inflation between the two years was 172 per cent.
B) typically, a good whose price was $100 in 1983 had a price of $58 this year.
C) typically, a good whose price was $172 in 1983 had a price of $100 this year.
D) typically, a good whose price was $100 in 1983 had a price of $139 this year.
E) typically, a good whose price was $100 in 1983 had a price of $172 this year.

Question 42

The price of dishwashers has remained relatively constant while the quality of dishwashers has improved. The CPI

A) is increased monthly to reflect the increased quality of dishwashers.
B) should not take account of any quality changes because it is a price index not a quality index.
C) has an upward bias if it is not adjusted to take account of the higher quality.
D) has an upward bias because it does not reflect the increased production of dishwashers.
E) is adjusted monthly to reflect the improvement in quality.

Question 43

Real GDP is $140 billion and nominal GDP is $180 billion. The GDP deflator equals

A) 222.2.
B) 2.86.
C) 100.0.
D) 128.6.
E) 77.0.

Question 44

In order to determine if the quantity of goods and services that an hour's work can buy has increased or decreased between 2014 anD₂019, one should compare the

A) 2014 nominal wage with the 2019 nominal wage.
B) 2014 real wage with the 2019 real wage.
C)2014nominal wage with the 2019 real wage.
D)2014 real wage with the 2019 nominal wage.
E) 2014 nominal wage with the 2019 nominal wage and the 2014 real wage with the 2019 real wage because both are important factors determining if workers can buy more or fewer goods with an hour's work.

Question 45

The difference between nominal and real is

A) nominal is measured in current dollars and real is measured in dollars of a given year.
B) real is measured in current dollars and nominal is measured in dollars of a given year.
C) both nominal and real are measured with index numbers, only the nominal index is greater than 100 and the real index is less than 100.
D) nominal is a number stated in dollars and real is stated with an index number.
E) real is a number stated in dollars and nominal is stated with an index number.

Question 46

To compare the price of a loaf of bread produced in 1993 with the price of a loaf produced in this year, you should compare the value of the bread in

A) nominal quantity.
B) nominal prices.
C) real quantity.
D) CPI quantity.
E) real prices.

Question 47

If the average price of a barrel of oil was $35 in 1990, when the CPI was 114.7 and $55 in 2019 when the CPI was 229.6, then the real cost of a barrel of oil

A) rose by 20 per cent during that period.
B) rose by 57 per cent during that period.
C) rose by 75.7 per cent during that period.
D) fell by 57 per cent during that period.
E) fell by 157 per cent during that period.

Question 48

If nominal GDP is $200 billion and the GDP deflator is 120, then real GDP is ________ billion.

A) $240
B) $167
C) $16.67
D) $200
E) $6

Question 49

In Australia between 1997and 2018, the

A) real and the nominal wage rates decreased by the same amount.
B) nominal wage rate decreased and the real wage rate increased.
C) nominal wage rate increased more than the real wage rate.
D) real wage rate increased more than the nominal wage rate.
E) nominal and real wage rates increased by the same amount.

Question 50

The core inflation rate is

A) the annual percentage change in the GDP deflator.
B) the annual percentage change in the chain price index of Household Final Consumption Expenditure.
C) the annual percentage change in the trimmed-mean CPI.
D) the annual percentage change in the CPI.
E) All of the above.

Question 51

In 2012, Cameron began his career with HSBC. His starting salary was $32,000. By 2019, his salary had increased to $55,000. If the CPI was 100.0 in 2012 and 117.5 in 2019, Cameron's 2019 real income in 2012 dollars is

A) $37,625.
B) $52,400.
C) $32,000.
D) $46,808.
E) $55,000.

Question 52

Suppose Mack's wage was $7.00 an hour in 2001 and $12.00 an hour in 2012. The CPI was 94 in 2001 and 201 in 2012. The 2001 hourly wage in terms of 2012 dollars is

A) $7.00.
B) $3.48.
C) $14.07.
D) $14.97.
E) $13.16.

Question 53

If the price of jet fuel imported from Russia and used by Qantas suddenly increases, then the CPI will ________ and the GDP deflator will ________.

A) not change; increase
B) increase; increase
C) increase; not change
D) increase; increase by more than the CPI
E) not change; not change

Question 54

When we compare the records of the CPI and the chain price index of Household Final Consumption Expenditure (HFCE) over time, the

A) CPI tends to exceed the chain price index of HFCE.
B) two are very different in magnitude.
C) chain price index tends to exceed the CPI.
D) two measures are identical.
E) CPI tends to exceed the chain price index when inflation is high, and the chain price index tends to exceed the CPI when inflation is low.

Question 55

If the inflation rate is greater than the nominal interest rate, then the

A) real interest rate will be negative.
B) inflation rate will increase.
C) nominal interest rate will be negative.
D) real interest rate will be positive.
E) inflation rate will decrease.

Question 56

If you get an 8 per cent increase in your nominal income, your real income

A) definitely increases.
B) increases if the inflation rate is more than or equal to 8 per cent.
C) increases only if the inflation rate is more than 8 per cent.
D) increases only if the inflation rate is less than 8 per cent.
E) increases only if the inflation rate is equal to 8 per cent.

Question 57

Which of the following statements about the nominal and real wage rates is correct?

A) The nominal wage rate is measured in the dollars of a base year.
B) The real wage rate indicates how many goods and services can be purchased with an hour's labour.
C) The nominal wage rate equals the real wage rate divided by the CPI and then multiplied by 100.
D) The real wage rate is measured in current year dollars.
E) The real wage rate equals the nominal wage rate multiplied by the CPI then divided by 100.

Question 58

If your real income in base year prices is $50,000 and the CPI is 170, what is your nominal income?

A) $70,000.00
B) $29,411.76
C) $50,000.00
D) $85,000.00
E) $71,428.57

Question 59

If prices have decreased since the base period, then

A) there is no way to adjust nominal GDP so that it equals real GDP.
B) real GDP is smaller than nominal GDP.
C) real GDP is larger than nominal GDP.
D) real GDP is equal to nominal GDP.
E) real GDP can no longer be compared to nominal GDP.

Question 60

A ham and cheese sandwich at the local cafe costs $4.99 in 2005. If the CPI in 2005 was 90.0 and the CPI today is 121.0, the equivalent price for the ham and cheese sandwich today is

A) $6.04.
B) $5.29.
C) $4.99.
D) $6.71.
E) $5.54.

Question 61

If we look at real and nominal interest rates in Australia since 1971, we see that

A) the difference between the nominal and real interest rates widened during the 1990s because of inflation.
B) both the nominal and real interest rates were negative in the highly inflationary 1970s.
C) the nominal interest rate has always been less than the real interest rate because of inflation.
D) at times the nominal interest rate has been greater than the real interest rate and at times has been less than it.
E) the real interest rate has almost always been less than the nominal interest rate because of inflation.

Question 62

You borrow at a nominal interest rate of 10 per cent. If the inflation rate is 4 per cent, then the real interest rate is

A) the $10 in interest you have to pay.
B) 16 per cent.
C) 6 per cent.
D) 14 per cent.
E) 2.5 per cent.

Question 63

If the nominal interest rate is greater than the real interest rate,

A) it is an indication of economic growth.
B) the real interest rate must be negative.
C) inflation must be occurring.
D) lenders must lose because they can only make loans using the real interest rate.
E) None of the above answers is correct because it is not possible for the nominal interest rate to exceed the real interest rate.

Question 64

The nominal wage rate is the

A) minimum hourly wage rate measured in the dollars of a given reference base year.
B) average hourly wage rate measured in the dollars of a given reference base year.
C) average hourly wage rate measured in current dollars.
D) minimum hourly wage that a company can legally pay a worker.
E) wage rate after it has been adjusted for inflation.

Question 65

If the CPI is 170 at the beginning of the year and 181 at the end, and a bank is paying a nominal interest rate of 6 per cent, we see that

A) the real interest rate is positive and is larger than 1 per cent.
B) the real interest rate is equal to zero.
C) the real interest rate is positive and is less than 1 per cent.
D) the real interest rate is negative.
E) the nominal interest rate is negative.

Question 66

Westpac charges an 11 per cent interest rate on all new car loans. If the inflation rate is 6 per cent, Westpac receives a real interest rate of

A) 1.83 per cent.
B) 0.54 per cent.
C) 6 per cent.
D) 5 per cent.
E) 11 per cent.

Question 67

If the real interest rate is 5 per cent when the inflation rate is 4 per cent, the nominal interest rate is

A) 1 per cent.
B) 9 per cent.
C) 1.25 per cent.
D) .80 per cent.
E) 20 per cent.