Deck 6: Measuring the Cost of Living

Question 1

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

Answer 1

A

Question 2

Which of the following 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

Answer 2

B

Question 3

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 stocks on the Toronto Stock Exchange

Answer 3

B

Question 4

Use the table below to answer the following questions.
Table 6-2

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 2011?

A)21.33 percent
B)25 percent
C)28.89 percent
D)36.11 percent

Question 5

Use the table below to answer the following questions.
Table 6-1

Refer to Table 6-1. Suppose that the typical consumer basket consists of 5 bushels of peaches and 10 bushels of pecans and that the base year is 2010. What is the consumer price index for 2010?

A)100
B)160
C)200
D)There is insufficient information to answer this question.

Question 6

How often is the CPI calculated?

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

Question 7

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 8

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 least and the most expensive goods and services in each major category of consumer expenditures

Question 9

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. However, prices have also risen since 1931. What can we conclude from this information?

A)The best baseball players today are better off than Babe Ruth was in 1931.
B)Because prices have also risen, the standard of living of baseball stars hasn't changed since 1931.
C)One cannot make judgments about changes in the standard of living based on changes in prices and changes in incomes.
D)One cannot determine whether baseball stars today enjoy a higher standard of living than Babe Ruth did in 1931 without additional information regarding increases in prices since 1931.

Question 10

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 11

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 12

Which of the following 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 13

Use the table below to answer the following questions.
Table 6-1

Refer to Table 6-1. What was the inflation rate in 2011?

A)25 percent
B)20 percent
C)5 percent
D)4 percent

Question 14

Use the table below to answer the following questions.
Table 6-2

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 2011 if the base year is 2010?

A)120
B)109.22
C)136.11
D)150

Question 15

Use the table below to answer the following questions.
Table 6-1

Refer to Table 6-1. Suppose that the typical consumer basket consists of 5 bushels of peaches and 10 bushels of pecans and that the base year is 2010. What is the consumer price index for 2011?

A)80
B)100
C)125
D)200

Question 16

Which of the following situations 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)The economy is growing rapidly.

Question 17

How does a rise in 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

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.

Question 19

Which of the following agencies calculates the CPI?

A)the National Price Board
B)the Department of Weight and Measurements
C)Statistics Canada
D)the Ministry of Finance

Question 20

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 21

From October 2009 to October 2010, 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 5.1 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 22

The price index is 320 in one year and 360 in the next. What was the inflation rate?

A)6.7 percent
B)8 percent
C)11.1 percent
D)12.5 percent

Question 23

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

A)11.1 percent
B)14.3 percent
C)16.7 percent
D)19.0 percent

Question 24

Use the following information to answer the following questions.
In the country of Shem, the CPI is calculated using a market basket consisting of 5 apples, 4 loaves of bread, 3 robes, and 2 litres of gasoline. The per-unit prices of these goods have been as follows:
Table 6-3

Refer to Table 6-3. What was the inflation rate, as measured by the CPI, between 2009 and 2010?

A)40 percent
B)40.25 percent
C)46.46 percent
D)It is impossible to determine without knowing the base year.

Question 25

Which of the following prices change 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 26

Use the following information to answer the following questions.
In the country of Shem, the CPI is calculated using a market basket consisting of 5 apples, 4 loaves of bread, 3 robes, and 2 litres of gasoline. The per-unit prices of these goods have been as follows:
Table 6-3

Refer to Table 6-3. What was the inflation rate, as measured by the CPI, between 2008 and 2009?

A)28.5 percent
B)34.2 percent
C)47 percent
D)It is impossible to determine without knowing the base year.

Question 27

The price index is 270 in one year and 300 in the next. What is the inflation rate?

A)1 percent
B)9.3 percent
C)10 percent
D)11.1 percent

Question 28

If the consumer price index was 100 in the base year and 107 the following year, what was the inflation rate?

A)107 percent
B)10.7 percent
C)7 percent
D)0.7 percent

Question 29

How is the inflation rate calculated?

A)from a survey of 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 30

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 31

If the price index in the first year was 90, in the second year was 100, and in the third year was 95, what did the economy experience?

A)10 percent inflation between the first and second years and 5 percent inflation between the second and third years
B)10 percent inflation between the first and second years and 5 percent deflation between the second and third years
C)11 percent inflation between the first and second years and 5 percent inflation between the second and third years
D)11 percent inflation between the first and second years and 5 percent deflation between the second and third years

Question 32

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 33

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

A)100 to 110
B)150 to 170
C)180 to 189
D)220 to 235

Question 34

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 35

Use the following information to answer the following questions.
In the country of Shem, the CPI is calculated using a market basket consisting of 5 apples, 4 loaves of bread, 3 robes, and 2 litres of gasoline. The per-unit prices of these goods have been as follows:
Table 6-3

Refer to Table 6-3. For the CPI, what is the base year?

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

Question 36

The price index in the first year is 125, in the second year is 150, and in the third year is 200. 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, 75 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)50 percent between the first and second year, 100 percent between the second and third year

Question 37

Use the table below to answer the following questions.
Table 6-2

The market basket used to calculate the CPI in Aquilonia is 4 loaves of bread, 6 litres of milk, 2 shirts, and 2 pairs of pants. In 2005 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. In 2006 the price of bread was $1.75 per loaf, the price of milk was $2.25 per litre, the price of a shirt was $7.50, and the price of a pair of pants was $13.00. What was the inflation rate, as measured by the CPI, for Aquilonia between 2005 and 2006?

A)20 percent
B)24.4 percent
C)30 percent
D)36.67 percent

Question 38

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 39

The price index in 2009 is 120, and in 2010 it is 127.2. What is the inflation rate?

A)5 percent
B)6 percent
C)8 percent
D)The inflation rate is impossible to determine without knowing the base year.

Question 40

Use the following information to answer the following questions.
In the country of Shem, the CPI is calculated using a market basket consisting of 5 apples, 4 loaves of bread, 3 robes, and 2 litres of gasoline. The per-unit prices of these goods have been as follows:
Table 6-3

Refer to Table 6-3. What was the inflation rate, as measured by the CPI, between 2007 and 2008?

A)-8.89 percent
B)-7.14 percent
C)3.75 percent
D)11.25 percent
E)It is impossible to determine without knowing the base year.

Question 41

If the cost of transportation and the cost of food both increase by 30 percent, 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 9 percent
D)by about 11 percent

Question 42

Table 6-5
The table below pertains to an economy with only two goods-books and calculators. The fixed basket consists of 5 books and 10 calculators.

Refer to Table 24-5. Using 2005 as the base year, what is the inflation rate?

A)13.3 percent for 2006 and 14.8 percent for 2007
B)13.3 percent for 2006 and 55 percent for 2007
C)35 percent for 2006 and 14.8 percent for 2007
D)35 percent for 2006 and 55 percent for 2007

Question 43

Table 6-5
The table below pertains to an economy with only two goods-books and calculators. The fixed basket consists of 5 books and 10 calculators.

Refer to Table 6-5. Using 2007 as the base year, what is the consumer price index?

A)52.66 in 2005, 84.25 in 2006, and 106.5 in 2007
B)64.52 in 2005, 87.10 in 2006, and 100 in 2007
C)52.66 in 2005, 90.89 in 2006, and 100 in 2007
D)100 in 2005, 135 in 2006, and 155 in 2007

Question 44

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 45

Which of the following best characterizes the consumer price index?

A)It is a measure of a nation's standard of living.
B)It shows the increase in productivity.
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 46

For the following questions consider the table below, which shows the CPI for various categories of goods and services.
Table 6-4

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

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

Question 47

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 48

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

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

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 price change

Question 50

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

A)4.1 percent
B)10.6 percent
C)12 percent
D)16.9 percent

Question 51

What does the rate of core inflation EXCLUDE?

A)clothing and footwear
B)alcoholic beverages and tobacco products
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

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

A)26.8, 16.9
B)16.9, 26.8
C)19.8, 16.9
D)16.9, 19.8

Question 53

From 2000 to 2001 the CPI for medical care rose from 260.8 to 272.8. What was the inflation rate for medical care?

A)12 percent
B)11.1 percent
C)4.9 percent
D)4.6 percent

Question 54

For the following questions consider the table below, which shows the CPI for various categories of goods and services.
Table 6-4

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 55

Table 6-5
The table below pertains to an economy with only two goods-books and calculators. The fixed basket consists of 5 books and 10 calculators.

Refer to Table 6-5. Using 2005 as the base year, what is the consumer price index?

A)100 in 2005, 135 in 2006, and 155 in 2007
B)100 in 2005, 270 in 2006, and 310 in 2007
C)200 in 2005, 270 in 2006, and 310 in 2007
D)200 in 2005, 540 in 2006, and 620 in 2007

Question 56

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

A)shelter
B)recreation, education, and reading
C)transportation
D)food

Question 57

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

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

Question 58

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

Question 59

Table 6-5
The table below pertains to an economy with only two goods-books and calculators. The fixed basket consists of 5 books and 10 calculators.

Refer to Table 6-5. Using 2006 as the base year, what is the consumer price index?

A)78.22 in 2005, 100 in 2006, and 121.10 in 2007
B)74.07 in 2005, 100 in 2006, and 114.81 in 2007
C)100 in 2005, 135 in 2006, and 155 in 2007
D)200 in 2005, 270 in 2006, and 310 in 2007

Question 60

If the cost of health and personal care increases by 50 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 61

Laura buys word processing software in 2010 for $50. Laura's twin brother Laurence buys an upgrade of the same software in 2011 for $50. Which of the following problems 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 62

Consumers begin purchasing houses incorporating steel studs instead of wooden studs after the price of lumber increases. Which of the following problems 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 63

Which of the following problems in the construction of the CPI is the invention of pocket-sized computers most relevant to?

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

Question 64

Samantha goes to the grocery store to make her monthly purchase of ginger ale. As she enters the soft drink section, she notices that the price of ginger ale has been increased 15 percent, so she decides to buy some peppermint tea instead. Which of the following problems 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 65

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 66

Which of the following problems 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 67

Suppose the price of a litre of milk rises from $1 to $1.25 and the price of a T-shirt rises from $8 to $10. If the CPI rises from 150 to 175, what will people likely buy?

A)more milk and more T-shirts
B)more milk and fewer T-shirts
C)less milk and more T-shirts
D)less milk and fewer T-shirts

Question 68

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

A)It understates the cost of living.
B)It overstates the cost of living.
C)It may overstate or understate the cost of living depending on how much prices rise.
D)It doesn't accurately reflect the cost of living, but it is unclear if it overstates or understates the cost of living.

Question 69

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 by about how much?

A)3.4 percentage points
B)2.1 percentage points
C)1.6 percentage points
D)0.6 of a percentage point

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 lawn mowers are part of the market basket used to compute the CPI. Then suppose that the quality of lawn mowers improves while the price of lawn mowers stays the same. If Statistics Canada precisely adjusts the CPI for the improvement in quality, then, other things equal, what will happen?

A)The CPI will rise.
B)The CPI will fall.
C)The CPI will stay the same.
D)Lawn mowers will no longer be included in the market basket.

Question 72

For some racquet sports there have been increases in the size of the racquets and the methods and materials used for making them have improved. Which of the following problems in the construction of the CPI is this change in racquets most relevant to?

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

Question 73

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

Question 74

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 75

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 76

Suppose that dairy products have risen in price less than prices in general over the past several years. Which of the following problems 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 77

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 government programs use the CPI to adjust for changes in the overall level of prices
D)because if the price level is overstated, consumers will be taken advantage of by sellers of consumer goods

Question 78

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 cost less 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 79

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 80

Suppose that in 2010, 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 of the following problems in the construction of the CPI would this situation represent?

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