Deck 25: Measuring the Cost of Living

Question 1

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

Answer 1

True

Question 2

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

Answer 2

When the CPI increases, the average family has to spend more to maintain its standard of living

Question 3

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

Answer 3

inflation

Question 4

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

Question 5

Most studies indicate that the CPI overstates increases in the cost of living by 0.5 to 2 percentage points each year.

Question 6

If the 2012 CPI increased by 5 per cent, economists would estimate that the true cost of living had increased by about 4 per cent.

Question 7

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 8

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

Question 9

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.

Question 10

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

Question 11

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

Question 12

Banks tend to offer low interest rates for saving in periods of low expected inflation.

Question 13

Pete puts $100 in a savings account that pays an annual interest rate of 10 per cent. By the end of the year, the CPI has increased from 120 to 130. The purchasing power of Pete's bank account has remained unchanged.

Question 14

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 15

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

Question 16

Core inflation and headline inflation tend to be equal.

Question 17

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

Question 18

Indexation is only used in the payment of transfers.

Question 19

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

Question 20

The RBA uses headline inflation as the basis for its cash rate decision.

Question 21

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 22

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

A) 5 per cent
B) 25 per cent
C) -5 per cent
D) 150 per cent

Question 23

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 24

The price index in 2011 is 120, and in 2012 the price index is 126. What is the inflation rate?

A) 5 per cent
B) 6 per cent
C) 26 per cent
D) The inflation rate is impossible to determine without knowing the base year

Question 25

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 26

The producer price index measures:
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 27

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 1 per cent
C) about 3 per cent
D) about 5 per cent

Question 28

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 29

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 30

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 31

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 32

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 33

Which is the most accurate statement about the relationship between inflation and interest rates?

A) The nominal interest rate is the difference between the real interest rate and the rate of inflation
B) The real interest rate is the difference between the nominal interest rate and the rate of inflation
C) The real interest rate is the nominal interest rate times the rate of inflation
D) The nominal interest rate is the real interest rate times the rate of inflation

Question 34

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 35

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 36

Dick N. buys a house in 1973 and finances it with a mortgage that carries an annual interest rate of 7 per cent. Inflation in 1973 is 3 per cent, inflation in 1974 is 4 per cent, and inflation in 1975 is 5 per cent. What is the real interest rate Dick pays on his mortgage in 1974?

A) 3 per cent
B) 4 per cent
C) 5 per cent
D) 7 per cent

Question 37

In the CPI, goods and services are weighted according to:

A) whether the goods and services are necessities or luxuries
B) the levels of production of the goods and services in the domestic economy
C) how much of each item consumers buy
D) a random weighting scheme

Question 38

If the CPI were 100 in the base year and 110 in the following year, the inflation rate would be:

A) 110 per cent
B) 100 per cent
C) 11 per cent
D) 10 per cent

Question 39

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 40

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 41

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) 9 per cent

Question 42

If nominal GDP increased by 11 per cent while real GDP increased by only 5 per cent, then:

A) the price level remained steady but real output fell by around 6 per cent
B) the price level must have increased by around 16 per cent
C) the price level must have increased by around 6 per cent
D) the unemployment rate must have fallen during the year

Question 43

Henry and Ellen meet George, the banker, to work out the details of a loan. George, Ellen and Henry all expect that inflation will be 5 per cent over the term of the loan, and they agree on a nominal interest rate of 10 per cent. In actuality, the inflation rate is 8 per cent over the term of the loan.
a. What is the expected real interest rate?
b. What is the actual real interest rate?
c. Who benefits and who loses because of the unexpected inflation?

Question 44

The basket of goods cost $160 in the year 2005 and $424 in the year 2006. What is the CPI in 2006 when the base year is 2005?

A) 38
B) 265
C) 160
D) 678

Question 45

Suppose people consume only two goods, apple pies and meat pies:

Question 46

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 47

When the Reserve Bank is assessing whether to increase interest rates, it does so in the belief that:

A) food prices have gone down too much
B) aggregate supply within the economy is in surplus
C) expected aggregate demand will place less pressure on prices
D) expected aggregate demand will place more pressure on prices

Question 48

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 49

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 50

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

Question 51

The CPI is 100 for the year 2007, 250 for the year 2008, and 380 for the year 2009. What is the inflation rate in 2009?

A) 52 per cent
B) 150 per cent
C) 60 per cent
D) 300 per cent

Question 52

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