Deck 25: Measuring the Cost of Living

Question 1

CPI may overestimate the true rate of inflation.

Answer 1

True

Question 2

An increase in the price of a domestically produced capital good will increase the GDP deflator but not the CPI.

Answer 2

True

Question 3

When Gustav came to Australia in 1950, he took a job in a steel mill at $10 per day.If the price index was 30 in 1950 and 120 in 1990, Gustav's 1950 wage in 1990 dollars was $120 per day.

Answer 3

False

Question 4

The CPI is calculated from a basket of goods that every consumer purchases each period, and is based on a household consumer preferences survey.

Question 5

When the price of oil rises, the GDP deflator rises by much more than does the CPI, since oil and oil products are a much larger share of consumer spending than they are of GDP.

Question 6

When inflation is high, lenders will charge a high nominal interest rate.

Question 7

Indexation is a way of compensating beneficiaries for rises in prices.

Question 8

When inflation is high, lenders will charge a high nominal interest rate.

Question 9

The substitution bias refers to choices consumers make between the categories of goods that form the basis for the CPI calculation.

Question 10

Which is the most accurate statement about the CPI?

A)When the CPI increases, the average family has to spend less to maintain its standard of living
B)When the CPI increases, the average family has to spend more to maintain its standard of living
C)When the CPI increases, the standard of living of the average family increases
D)The CPI has nothing to do with the average family's standard of living

Question 11

The GDP deflator is the ratio of nominal GDP to real GDP.

Question 12

When nominal GDP exceeds real GDP it means that prices are higher.

Question 13

The interest rate a bank pays is the nominal interest rate, and the interest rate adjusted for inflation is the real interest rate.

Question 14

If the 2012 CPI increased by five per cent, economists would estimate that the true cost of living had increased by about 4 per cent.

Question 15

The CPI is a perfect measure of the cost of living.

Question 16

The real interest rate equals nominal interest rate plus the inflation rate.

Question 17

The basket of goods has remained the same since 2000, as common consumer preferences have tended to stay constant.

Question 18

The CPI can be used to turn dollar figures into meaningful measures of purchasing power.

Question 19

Indexation is only used in the payment of transfers.

Question 20

When the overall level of prices in the economy is increasing, we say that the economy is experiencing:

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

Question 21

The price of a specific good or service in comparison with the prices of other goods and services is called:

A)a relative price
B)a real price
C)indexing
D)indexing

Question 22

The base year for the CPI is updated:

A)so that every change in consumer purchases can be immediately included
B)to provide work for government economists
C)because the pattern of consumer purchases changes over time
D)because the CPI always uses the current year as the base year

Question 23

In Econoland in 2008, people with incomes between $20 000 and $30 000 must pay 12% of their income in taxes, and people with incomes between $30 001 and $40 000 must pay 15%.In 2008, the CPI in Econoland equals 1.20 and increases to 1.26 in 2009.If the government of Econoland wants to keep households with a given real income from being pushed up into a higher tax bracket by inflation, the $20 000 to $30 000 bracket will be changed to:

A)$15 873 to $23 810
B)$21 000 to $31 500
C)$24 000 to $37 800
D)$25 200 to $37 800

Question 24

Dick N.buys a house in 1973 and finances it with a mortgage that carries an annual interest rate of seven per cent.Inflation in 1973 is three per cent, inflation in 1974 is four per cent, and inflation in 1975 is five per cent.What is the real interest rate Dick pays on his mortgage in 1974?

A)three per cent
B)four per cent
C)five per cent
D)seven per cent

Question 25

There is debate among economists about measurement problems of the CPI.Economists' best estimate of the CPI's degree of overstatement in the cost of living is:

A)about 0.1 per cent
B)about one per cent
C)about three per cent
D)about five per cent

Question 26

If you borrow money at what you believe is an appropriate interest rate for the level of expected inflation, but the actual inflation rate turns out to be much higher than you had expected:

A)you will be paying the loan back with dollars that have much less purchasing power than you had expected
B)you will be paying the loan back with dollars that have much higher purchasing power than you had expected
C)you will be paying the loan back with dollars that have the same purchasing power as the dollars you borrowed
D)you, the borrower, will gain from an intended redistribution of wealth

Question 27

The substitution bias in the CPI results from the index not taking into account:

A)the substitution of new goods for old goods in the purchases of consumers
B)that consumers substitute towards goods that have become relatively less expensive
C)the substitution of new prices for old prices in the basket of goods from one year to the next
D)the substitution of quality for quantity in consumer purchases over time

Question 28

Karl's 1950 salary was $15 000.The CPI is 27 for 1950, and 150 for 2009.What is Karl's salary in 2009 dollars?

A)$83 333
B)$27 000
C)$40 500
D)$22 500

Question 29

If all prices, including the price of beef, increase by 3%, then the relative price of beef has ____ and there _____ inflation.

A)increased; is
B)increased; is no
C)remained constant; is
D)remained constant; is no

Question 30

Which change in the price index shows the greatest rate of inflation: 100 to 110, 150 to 165, or 180 to 198?

A)The first
B)The second
C)The third
D)They are all the same rate

Question 31

A Korean company produces biscuits in Australia and exports all of them to Russia.If the price of the biscuits increases, then:

A)the GDP deflator and the CPI both increase
B)the GDP deflator increases and the CPI is unchanged
C)the GDP deflator is unchanged and the CPI increases
D)the GDP deflator and the CPI are unchanged

Question 32

An important difference between the GDP deflator and the CPI is that:

A)the GDP deflator reflects the prices of all goods and services produced domestically, whereas the CPI reflects the prices of goods and services bought by consumers
B)the GDP deflator reflects the prices of goods and services bought by producers, whereas the CPI reflects the prices of goods and services bought by consumers
C)the GDP deflator reflects the prices of all goods and services produced by a nation's resources, whereas the CPI reflects the prices of goods and services bought by consumers
D)the GDP deflator reflects the prices of goods and services bought by producers and consumers, whereas the CPI reflects the prices of goods and services bought by consumers

Question 33

If the nominal interest rate is 10 per cent and the rate of inflation is 15 per cent, the real interest rate is:

A)five per cent
B)25 per cent
C)minus five per cent
D)150 per cent

Question 34

In 1984, Allen buys a new stereo system at the Modern technology Hi-Fi store.He is told by the salesman that Mr Steve Jobs Bose has invented a computer that allows you to do complex calculations and word processing in your home.Allen buys an Apple Mac.This purchase illustrates which of the following problems in the CPI's construction?

A)Substitution bias
B)Introduction of new goods
C)Unmeasured quality change
D)Both B and C

Question 35

For any given year, the CPI is:

A)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
B)higher than the previous year
C)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
D)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 divided by 100

Question 36

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

A)A survey is conducted to determine how much of each good and service a typical consumer purchases
B)All goods and services are weighted equally
C)Each good and service is weighted according to its price
D)Weights are randomly assigned

Question 37

An increase in the price of domestically produced industrial robots will be reflected in:

A)both the GDP deflator and the CPI
B)neither the GDP deflator nor the CPI
C)the GDP deflator but not in the CPI
D)the CPI but not in the GDP deflator

Question 38

The producer price index measures:

A)the cost of a basket of goods and services sold by producers
B)the cost of a basket of goods and services bought by firms
C)the cost of a basket of goods and services typical of those produced in the economy
D)the cost of a basket of goods and services produced for a typical consumer

Question 39

Which of the following is the most accurate statement about the relationship between the nominal interest rate and the real interest rate?

A)The real interest rate is the nominal interest rate times the rate of inflation
B)The real interest rate is the nominal interest rate plus the rate of inflation
C)The real interest rate is the nominal interest rate minus the rate of inflation
D)The real interest rate is the nominal interest rate divided by the rate of inflation
E)None of the above are accurate statements

Question 40

The basket of goods costs $80 in 2011 and $140 in 2012.What is the CPI in 2012 when the base year is the year 2011?

A)57
B)140
C)175
D)60

Question 41

If the real interest rate is three per cent and the inflation rate is seven per cent, then the nominal interest rate equals:

A)three per cent
B)four per cent
C)seven per cent
D)10 per cent

Question 42

Harry Porter worked at a library in 1996.A day's work paid him $35.If the price index was 65 in 1990 and 160 in 2011, how much was Harry's daily wage worth in 2011?

A)$42
B)$51
C)$86
D)It is too difficult to calculate, as Harry would have become much better at his job

Question 43

Suppose that the residents of Fashionland spend all of their income on dresses, hats and shoes.In 2010, they buy four dresses for $800, five hats for $500 and two pairs of shoes for $400.In 2011 they buy five dresses for $900, five hats for $600 and four pairs of shoes for $600.
a.If the base year is 2010, what is the CPI in both years?
b.What is the inflation rate in 2011?

Question 44

On 1 January 2000, Edward invested $10 000 at five per cent interest for one year.The CPI on 1 January 2000 stood at 1.60.On 1 January 2001, the CPI was 1.76.
a.What is the real interest rate?
b.If Edward borrowed the $10 000 from Jack at 10 per cent interest for one year, who benefits and who loses in this situation?

Question 45

If a borrower and lender agree to an interest rate on a loan when inflation is expected to be seven per cent and inflation turns out to be 10 per cent over the life of the loan, then the borrower _____ and the lender ______.

A)gains; gains
B)gains; loses
C)is not affected; gains
D)loses; gains

Question 46

Suppose the value of the CPI is 1.10 in year one, 1.16 in year two, and 1.27 in year three.Assume also that the price of computers increases by three per cent between year one and year two, and by another three per cent between year two and year three.The price level is increasing, the inflation rate is _______, and the relative price of computers is _________.

A)increasing; increasing
B)constant; increasing
C)constant; decreasing
D)increasing; decreasing

Question 47

Why do economists believe that the CPI overstates inflation?

Question 48

In 2010, nominal GDP is $500 million and real GDP is $550 million.What is the GDP deflator?

A)-50
B)50
C)91
D)110

Question 49

Masako buys a house in 1999.She obtains a mortgage that carries an annual interest rate of 12 per cent, and makes payments of $880 per month.The CPI in 1999 is 100, in 2000 it is 110, and in 2001 it is 120.What is the inflation rate in 2001?

A)120 per cent
B)20 per cent
C)10 per cent
D)nine per cent

Question 50

If workers and employers expecting three per cent inflation agree to a three-year wage contract, and inflation turns out to be five per cent, then:

A)workers gain and employers gain
B)workers gain and employers lose
C)workers lose and employers gain
D)workers lose and employers lose

Question 51

Susan Webster deposits $1000 for a year in a bank account that pays an annual interest rate of 4 per cent.If the inflation rate is 6 per cent, then Susan's purchasing power has approximately:

A)risen by two per cent
B)fallen by 2 per cent
C)fallen by 12 per cent
D)risen by 12 per cent

Question 52

Les buys a house in 2009.He obtains a fixed 10 per cent mortgage interest rate, and makes payments of $1000 per month.The 2009 CPI is 90, the 2010 CPI is 90, the 2011 CPI is 100, the 2012 CPI is 110 and the 2013 CPI is 120.
a.What is the real mortgage interest rate Les pays in 2010, 2011, 2012 and 2013?
b.What are the values in 2009 dollars of Les's monthly mortgage payments in 2010, 2011, 2012 and 2013?

Question 53

Suppose that the prices of imported consumption goods rose from the base year.Which is the most accurate statement about the CPI and the GDP deflator?

A)The GDP deflator rises but the CPI doesn't change
B)The CPI rises but the GDP deflator doesn't change
C)Both the GDP deflator and the CPI rise
D)Both the GDP deflator and the CPI don't change

Question 54

Table 1 shows the following amounts for the years 2010 to 2012. $\begin{array}{|l|l|l|}\hline \text { Year } & \text { Nominal GDP } & \text { Real GDP } \\\hline 2010 & \$ 500 & \$ 500 \\\hline 2011 & \$ 600 & \$ 545.5 \\\hline 2012 & \$ 720 & \$ 600 \\\hline\end{array}$
Prices in $billions
a.What is the GDP deflator for the three years?
b.Which is growing faster: nominal GDP or real GDP?

Question 55

Suppose people consume only two goods, apple pies and meat pies:
$\begin{array}{lllll} & \text { 2010 price (\$) } & \text { 2012 quantity } & \text { 2011 price (\$) } & \text { 2011 quantity } \\\text { Apple pies } & 8 & 50 & 10 & 50 \\\text { Meat pies } & 10 & 100 & 12 & 100\end{array}$
a.What is the percentage increase in the price of food and in the price of clothing?
b.What is the percentage increase in the overall price level?
c.Do these price changes affect all consumers to the same extent? Explain.