Deck 7: The Cpi and the Cost of Living

Question 1

In 2013,the reference base period for the CPI for the nation of Webot,a typical consumer spent $30 on potatoes and $150 on steak.If the price of steak is $15 and the price of potatoes is $1 then there are ________ units of steak and ________ units of potatoes in the CPI market basket.

A)150;30
B)10;30
C)5;30
D)30;150
E)None of the above answers is correct.

Answer 1

B

Question 2

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.

Answer 2

D

Question 3

The CPI stands for

A)Consumer Paying Index.
B)Corporate Pricing Index.
C)Citizens Paying Index.
D)Consumer Price Index.
E)Corporate/Consumer Payment Index.

Answer 3

D

Question 4

The Consumer Price Index measures the average of the prices paid by urban consumers for a ________ of consumer goods and services.

A)subjective selection
B)random selection
C)fixed market basket
D)changing selection
E)least-cost market basket

Question 5

The items included in the CPI are

A)only goods and services produced within the current year and consumed by the typical household.
B)final goods and services produced in Australia.
C)final goods produced in Australia.
D)goods but not services consumed by the typical urban household.
E)goods and services consumed by the typical urban household.

Question 6

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.

Question 7

The CPI market basket

A)is comprised of a representative sample of the goods that the government guesses people buy.
B)weights the goods and services according to the budget of an average urban household.
C)includes only goods and not services.
D)includes only Australian-produced goods and services.
E)contains one unit of each good purchased by the average consumer.

Question 8

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 9

The Consumer Price Index (CPI)measures the changes in the

A)prices paid by consumers and businesses for a fixed market basket of goods and services.
B)quantities of a fixed market basket of goods produced by businesses.
C)prices paid by all businesses for a fixed market basket of production resources.
D)prices paid by consumers for a fixed market basket of consumer goods and services.
E)lowest prices paid by consumers for a fixed market basket of consumer goods and services.

Question 10

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 11

The CPI is calculated by the Australian Bureau of Statistics every

A)month.
B)year.
C)quarter.
D)week.
E)decade,along with the Census.

Question 12

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 13

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 14

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

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

Question 15

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 16

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 17

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 18

The more money an average household spends on one specific type of good or service per month,the

A)smaller the relative importance of that item in the CPI market basket.
B)larger the relative importance of that item in the CPI market basket.
C)costlier it will be to conduct the Household Expenditure Survey.
D)more frequently its price is checked when calculating the CPI.
E)less significant an increase in the price of that good or service will be for the household.

Question 19

According to the CPI basket,the largest item in households' budgets is

A)transportation.
B)food.
C)education.
D)housing.
E)clothing.

Question 20

The Household Expenditure Survey measures

A)the maximum price buyers will pay for a good or service.
B)households' spending patterns.
C)consumers' incomes.
D)the jobs at which consumers work.
E)the wholesale prices of what consumers buy so that a markup percentage can be found.

Question 21

Suppose that the CPI basket contains only 40 heads of cauliflower and 60 bunches of broccoli.If the price of cauliflower goes down by $1 per head and the price of broccoli goes up by $1 per bunch,then

A)the CPI increases.
B)the CPI decreases.
C)the CPI might increase or decrease depending how the quantities are affected by the price changes.
D)the CPI does not change.
E)There is not enough information to answer this question.

Question 22

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 23

Consumers in a country buy only two goods,pens and CDs.The prices and quantities purchased by urban households are in the table above.The reference base year is 2011.If the current year is 2012,the cost of the CPI market basket in 2012 is

A)$3,400.
B)$3,580.
C)$3,588.
D)$3,508.
E)$3,500.

Question 24

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.

Question 25

If the cost of the CPI market basket at current period prices is $1,000 and the cost of the CPI market basket at base period prices is $250,the CPI is

A)250.
B)400.
C)2)50.
D)100.
E)4)0.

Question 26

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 cost of the CPI market basket in 2012 is

A)$8.50.
B)$64.00.
C)$5.00.
D)$52.00.
E)Unable to be calculated because information is needed about the quantities purchased in 2010.

Question 27

The data in the table above shows the consumption by families in an economy.The year 2015 is the reference base period.
Based on the table above,the cost of the base period market basket in 2015 is

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

Question 28

The data in the table above shows the consumption by families in an economy.The year 2015 is the reference base period.
Based on the table above,the CPI for 2016 is

A)102.5.
B)105.1.
C)5)0 per cent.
D)98.5.
E)100.

Question 29

Suppose the CPI for this year is 133.7.This number means that

A)prices rose 33.7 per cent over the last year.
B)prices rose 133.7 per cent over the last year.
C)prices rose 33.7 per cent over the base year.
D)prices rose 133.7 per cent over the base year.
E)on average,goods cost $133.70 each this year.

Question 30

Consumers in a country buy only two goods,pens and CDs.The prices and quantities purchased by urban households are in the table above.If 2011 is the reference base year,the cost of the CPI market basket in the base year is

A)$3,508.
B)$3,408.
C)$3,400.
D)$3,580.
E)$3,500.

Question 31

If the prices of the goods and services contained in the CPI market basket increase from the base period to the next year,we know that

A)the next year's CPI will be above 100.
B)the next year's CPI will be below 100.
C)the cost of the CPI market basket at next year's prices is lower than the cost of the CPI market basket at base period prices.
D)the market basket used by the ABS must be changed next year to reflect consumers' new expenditures.
E)the inflation rate is falling.

Question 32

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 cost of the CPI market basket in 2011 is

A)$52.00.
B)100.
C)$5.00.
D)$3.50.
E)$64.00.

Question 33

The data in the table above shows the consumption by families in an economy.The year 2015 is the reference base period.
Based on the table above,the CPI for 2015 is

A)98.5.
B)102.5.
C)105.1.
D)100.
E)5)0 per cent.

Question 34

The data in the table above shows the consumption by families in an economy.The year 2015 is the reference base period.
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 35

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 36

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 37

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 38

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 39

The data in the table above shows the consumption by families in an economy.The year 2015 is the reference base period.
Based on the table above,between 2015 and 2016,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 40

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 41

The CPI was 170 last year and is 190 this year.What is the inflation rate between these two years?

A)20 per cent
B)11.8 per cent
C)15.0 per cent
D)10.5 per cent
E)18 per cent

Question 42

When the CPI rises ________,the inflation rate is ________.

A)steadily;zero
B)rapidly;low
C)rapidly;high
D)slowly;high
E)rapidly;either high,low or zero depending on whether production of output is increasing,decreasing or not changing.

Question 43

The CPI is biased because it

A)does not include services.
B)accurately measures the cost of living but not the cost of producing.
C)does not always take into account the changes in product quality.
D)takes into account the changes in product quality.
E)takes into account the changes in technology.

Question 44

The inflation rate between last year and this year was 14 per cent.The CPI was 118 this year.What was the CPI last year?

A)104.5
B)103.0
C)104.0
D)103.5
E)105.0

Question 45

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 46

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 47

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 48

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 49

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 50

The annual inflation rates in Australia in the 1970s and 1980s

A)were mostly negative.
B)were low when the price level was rising slowly.
C)were high when the price level was rising slowly.
D)were low when the price level was rising rapidly.
E)were high when the price level was rising rapidly.

Question 51

A country reports the total expenditures on the fixed CPI basket for the past three years.The cost of the CPI basket in 2010 was $23,000,the cost of the CPI basket for the reference base period,2011,was $23,805,and the cost of the CPI basket in 2012 was $24,500.The CPI for 2010 is

A)103.5.
B)100.0.
C)23.0.
D)96.6.
E)106.5.

Question 52

A country reports the total expenditures on the fixed CPI basket for the past three years.The cost of the CPI basket in 2010 was $23,000,the cost of the CPI basket for the reference base period,2011,was $23,805,and the cost of the CPI basket in 2012 was $24,500.The CPI for 2012 is

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

Question 53

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

Question 54

The inflation rate is the

A)difference in the price level from one year to the next multiplied by 100.
B)difference between the current period CPI and the base period CPI.
C)difference between the base period CPI and the current period CPI.
D)percentage change in the composition of the CPI market basket from the base year to the next year.
E)percentage change in the CPI from one year to the next year.

Question 55

Economists agree that the CPI

A)almost always shows the cost of living rising less rapidly than is the case in reality.
B)is a near perfect measure of the cost of living.
C)is a possibly biased measure of the cost of living.
D)has no relation to the cost of living.
E)overstates inflation by about 4.1 percentage points a year.

Question 56

Since 1305,in which century has the inflation rate been the highest?

A)The 14th century
B)The 16th century
C)The 17th century
D)The 20th century
E)The 15th century

Question 57

If the CPI decreases from one year to the next,then the inflation rate is

A)above 100.
B)negative.
C)0)
D)positive.
E)below 100.

Question 58

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 59

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 60

According to the historical record of inflation since the 1300s,the inflation rate

A)was at its lowest after Columbus arrived in America.
B)has always been consistently high.
C)was higher in the 1300s than in the 1900s.
D)reached the highest levels in the twentieth century.
E)was at its highest during the Industrial Revolution.

Question 61

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 62

If higher prices cause buyers to shop at discount stores,the CPI has

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

Question 63

If a private wage contract is agreed upon with a cost of living adjustment such that wage rises are equal to increases in the CPI,

A)workers exactly keep pace with changes in the cost of living.
B)the employer benefits because wages will rise less than the change in actual prices.
C)workers benefit because the CPI increases more rapidly than the cost of living.
D)the CPI bias means that workers benefit if the price level rises and the employer benefits if the price level falls.
E)the CPI bias means that workers benefit if the price level falls and the employer benefits if the price level rises.

Question 64

If the price of used cars rises,then the CPI will ________ and the GDP deflator will ________.

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

Question 65

Which of the following statements about the CPI is/are correct?
I)The only significant bias in the CPI is the commodity substitution bias.
Ii)In Australia it is estimated the CPI overstates inflation by 1.1 percentage points a year.
Iii)The RBA estimates that substitution bias is about 0.5 percentage points.

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

Question 66

Over half of federal and state government outlays are linked directly to the CPI.As time passes,the CPI bias means that the governments' outlays are

A)larger than needed to keep pace with the cost of living.
B)smaller than needed to keep pace with the cost of living.
C)smaller than needed to keep pace with the cost of living if the CPI is falling from one year to the next,otherwise the outlays are larger than needed to keep pace with the cost of living.
D)exactly equal to the changes in the cost of living.
E)larger than needed to keep pace with the cost of living if the CPI is falling from one year to the next,otherwise the outlays are smaller than needed to keep pace with the cost of living.

Question 67

When discussing the CPI,the term "commodity substitution bias" refers to changes in

A)income that lead households to change the items they buy.
B)prices that lead households to change the items they buy.
C)prices that lead businesses to change the items they buy.
D)stores so that consumers switch from one store to another.
E)quantities that lead households to change the items they buy.

Question 68

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 69

An example of the commodity substitution bias in the calculation of the CPI is a price increase in

A)new homes because people's incomes have increased.
B)e-books versus used books bought through the university bookshop.
C)a GPS unit versus a Melways map book.
D)a 2014 Toyota Camry versus a 2005 Honda Civic.
E)turkey when the price of chicken doesn't rise.

Question 70

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 71

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 72

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 73

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 74

The GDP deflator is

A)a measure of the price level.
B)the price level during the base year.
C)a measure of the level of production.
D)equal to nominal GDP during the base year.
E)always greater than 100.

Question 75

When a good gets better from one year to the next,the CPI has a(n)

A)commodity substitution bias.
B)new goods bias.
C)quality change bias.
D)magnitude of change bias.
E)outlet substitution bias.

Question 76

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 77

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 78

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 79

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 80

In constructing the CPI,the ABS has to deal with commodity substitution bias,which is defined as

A)consumers' substitution of cheaper goods for goods whose prices increase.
B)the bias from new goods being introduced that are more expensive than older goods.
C)the bias that arises because the ABS changes the CPI market basket each month.
D)consumers' substitution of discount stores for full service stores to avoid the higher prices in the full service stores.
E)the bias from quality changes in existing products that cause prices to increase.