Deck 19: Returns, Index Numbers and Inflation

Question 1

The weighted aggregate price index assigns a lower weight to the items that are sold in higher quantities.

Answer 1

False

Question 2

The only possible income from an investment is the direct cash payment from the underlying asset.

Answer 2

False

Question 3

As long as an investor does not sell an asset,there is no capital gain or loss involved.

Answer 3

False

Question 4

Which of the following statements is true of investment returns?

A)A change in the price of the underlying asset usually has no impact on returns to investment.
B)Income yield always accounts for the bulk of the returns from an investment.
C)The higher the price of the asset during the time of purchase,the lower the returns from that investment.
D)The higher the income yield,the lower the overall returns from that investment.

Question 5

Price indices are used to remove the effect of inflation so that business and economic time series can be evaluated in a more meaningful way.

Question 6

Donna Warne purchased a share of company X at $700 one year ago.The share is now trading at $850.Calculate the percent capital gain if Donna sells her share at the current price.

A)17.6%
B)150%
C)6.7%
D)21.4%

Question 7

The aggregate price index is used to represent relative price movements for a group of items.

Question 8

Index numbers provide direct comparisons of prices not only with respect to the base year,but also between non-base years.

Question 9

There is no need to have a constant base value for a price index.

Question 10

The Laspeyres and Paasche indices tend to differ when the length of time between the periods increases since the relative quantities of items adjust to the changes in consumer demand over time.

Question 11

The returns to which of the following investments comprises only on capital gains?

A)Shares
B)Bonds
C)Real estate investments
D)Treasury bills

Question 12

An unweighted price index for different types of properties will unfairly treat all property prices equally.

Question 13

If the nominal rate of return is positive,then the real rate of return must also be positive.

Question 14

Rates of return expressed in nominal terms do not represent a true picture because they are not adjusted for inflation.

Question 15

The Consumer Price Index and the Producer Price Index must always move in sync with each other.

Question 16

Since both the Laspeyres and Paasche indices are weighted aggregate price indices,they will yield the same value for a given evaluation period.

Question 17

Emily Myers purchased a share of company X at $700 one year ago and earned a dividend of $50 during the year.The share is trading now at $850.Calculate Emily's return from investment if she sells her share at $850.

A)7.14%
B)21.43%
C)28.57%
D)14.29%

Question 18

The Laspeyres price index uses the quantities evaluated in the base period to compute the weighted aggregate price index.

Question 19

Allen Gibbs purchased 50 shares of ABC Corp. ,each worth $110.If the price of the share increases to $135 after a year,what will be the capital gain if Allen sells all his shares?

A)$1,250
B)$25
C)$6,750
D)$5,500

Question 20

If the year 2000 is used as a base year and the value of the price index in 2001 is 105,it implies that there was a 5% increase in the price level in 2001.

Question 21

Exhibit 19-1.Joanna Robertson bought a share of XYZ Corp.at $200 last year.She was paid a dividend of $30 during the same year.However,the same share is trading at $280 this year. Refer to Exhibit 19-1.Calculate Joanna's capital gains percent yield if she sells the shares at $280.

A)80%
B)15%
C)40%
D)28.57%

Question 22

The price of a basket of goods in 2000 was $500.If the same basket cost $600 in 2002,identify the correct statement from the following.

A)The price index in 2002 must have been a 100 points higher than in 2000.
B)The price increase between 2000 and 2002 was 10%.
C)If 2000 is considered as the base year,then the price index in 2002 must be 120.
D)If 2002 is considered the base year,then the price index in 2000 must have been 70.

Question 23

If p_t is the price of good X in period t,and p₀ is the base period price,which of the following is the equation for a simple price index for good X?

A) .
B) .
C) .
D)

Question 24

Exhibit 19-2.Hugh Wallace has the following information regarding three investment options.Each investment option involves the same one-year period. Refer to Exhibit 19-2.Which of the following statements regarding these investment options is true?

A)Investment option 1 has the highest nominal rate of return.
B)The expected percent rate of interest during the time of maturity of investment option 3 is 1.48%.
C)Investment option 3 has the highest expected inflation rate and the lowest real rate of return.
D)Adjusted for inflation,investment option 1 is the best choice for Hugh.

Question 25

Exhibit 19-1.Joanna Robertson bought a share of XYZ Corp.at $200 last year.She was paid a dividend of $30 during the same year.However,the same share is trading at $280 this year. Refer to Exhibit 19-1.Calculate the investment percent yield if Joanna sells the share at $280.

A)70%
B)110%
C)15%
D)55%

Question 26

Exhibit 19-3.Consider the following information about the price and the price index of a popular book over three years. Refer to Exhibit 19-3.What was the price index for this book in 2010?

A)72
B)92.59
C)107.2
D)108

Question 27

The adjusted close price of a share is now $67.A year back,the adjusted close price of the same share was $50.What is the investment percent return for someone who holds 10 of these shares today?

A)34%
B)17%
C)20%
D)25.37%

Question 28

Exhibit 19-2.Hugh Wallace has the following information regarding three investment options.Each investment option involves the same one-year period. Refer to Exhibit 19-2.What nominal rate of return will Hugh earn if he invested in option 1?

A)0.79 percent
B)3.22 percent
C)0.32 percent
D)6.67 percent

Question 29

If the price index for a particular year is 75,it implies that:

A)prices have increased by 7.5% over the base year.
B)prices have increased by 0.75% over the base year.
C)prices have decreased by 0.25% compared to the base year.
D)prices have decreased by 25% compared to the base year.

Question 30

Exhibit 19-3.Consider the following information about the price and the price index of a popular book over three years. Refer to Exhibit 19-3.What was the approximate price of the book in 2011?

A)$10
B)$10.80
C)$8.10
D)$10.69

Question 31

Exhibit 19-2.Hugh Wallace has the following information regarding three investment options.Each investment option involves the same one-year period. Refer to Exhibit 19-2.What real percent rate of return will Hugh earn if he invests in option 2?

A)-2.5%
B)4.58%
C)0.96%
D)-3.37%

Question 32

Timothy Keating invested $120 in buying a share of company X in June last year.Although the company had announced that it will not pay any dividend,the price of this share has increased over the last few months,and is expected to go up to $140 by June this year.If the expected annual inflation rate in June this year is 5% calculate Timothy's real rate of return from this investment if he sells the share at $140.

A)11.11%
B)14.29%
C)- 22.22%
D)- 10%

Question 33

Jack Simmons is expecting to earn a 0.34% return on his investment in a government bond that matures next year.If the inflation rate during the time of maturity is expected to be 7% what will be the real rate of return from his investment?

A)6.64%
B)- 3.36%
C)- 6.22%
D)25%

Question 34

If the price index for a particular year is 110,it implies that:

A)prices have increased by 11% over the base year.
B)prices have increased by 10% over the base year.
C)prices have increased by 1.1% over the base year.
D)prices have increased by 0.10% over the base year.

Question 35

Which of the following correctly identifies the Fisher equation?

A)
B)
C)
D)

Question 36

Calculate the nominal percent return from an investment of $300 in a share whose price increases to $375 after a year.

A)75%
B)20%
C)25%
D)16.67%

Question 37

Which of the following investment options is the most profitable in percentage terms?

A)A government bond with a coupon payment of $10,purchased at $100 and sold at $90 after a year
B)A government bond with a coupon payment of $15,purchased at $175,and sold at $155 after a year
C)A share with a dividend payment of $5,purchased at $50,and sold at $60 after a year
D)A treasury bill purchased at $160 and sold at $175 after a year

Question 38

Which of the following types of returns captures the changes in purchasing power?

A)Nominal returns
B)Real returns
C)Income yield
D)Capital gains yield

Question 39

Exhibit 19-3.Consider the following information about the price and the price index of a popular book over three years. Refer to Exhibit 19-3.Identify the correct statement from the following.

A)The price of the book increased by 3.11% between 2010 and 2011.
B)If 2011 was the base year,the price index for the book in 2009 would have been 90.
C)Between 2009 and 2011,the price of the book went up by 11.11%.
D)If 2010 was the base year,the price index in 2009 would have been 99.28.

Question 40

Exhibit 19-1.Joanna Robertson bought a share of XYZ Corp.at $200 last year.She was paid a dividend of $30 during the same year.However,the same share is trading at $280 this year. Refer to Exhibit 19-1.Calculate Joanna's income percent yield from holding the share for a year.

A)15%
B)40%
C)55%
D)30%

Question 41

Exhibit 19-3.Consider the following information about the price and the price index of a popular book over three years. Refer to Exhibit 19-3.If the price index in 2011 was 95 instead of 111.11,it would imply that:

A)the price of the book in 2011 was 16.11% lower than its price in 2009.
B)2011 would be considered as the base year.
C)the price of the book in 2011 was 5% lower than its price in 2009.
D)the price of the book in 2011 would be $4.

Question 42

Which of the following statements is true about the comparison between the Laspeyres and Paasche indices?

A)The Laspeyres index is more expensive to compute than the Paasche index.
B)The data requirements are more stringent for the Laspeyres index than for the Paache index.
C)Unlike the Laspeyres index,the Paasche index incorporates current expenditure patterns of consumers.
D)Unlike the Paasche index,the Laspeyres index requires that the weights be updated each year and the index numbers be recomputed for all of the previous years.

Question 43

Exhibit 19-6.Three firms X,Y,and Z operate in the same industry,although their products have different features and are priced differently.The following table provides the prices and the quantities sold (in units)during the period 2000-2002. Refer to Exhibit 19-6.Compute the Laspeyres price index for 2002,using 2000 as the base year.

A)106.07
B)106.3
C)94.28
D)94.08

Question 44

Exhibit 19-5.Firms A,B,and C operate in the market for computers.Each firm's product is popular in the market and distinct from what the other firms offer.The following table shows the prices of laptops from 2005 through 2007. Refer to Exhibit 19-5.If 2006 is used as the base year,which of the following statements is true?

A)The prices in 2007 were 5.02% lower than the prices in 2005.
B)The price index for 2005 will be 100,as per the unweighted price index.
C)The unweighted price index for 2007 suggests that laptop prices were 8.17% lower than the prices in 2006,as per the unweighted price index.
D)The laptop prices in 2005 were 3.48% higher than the prices in 2006,as per the unweighted price index.

Question 45

Exhibit 19-6.Three firms X,Y,and Z operate in the same industry,although their products have different features and are priced differently.The following table provides the prices and the quantities sold (in units)during the period 2000-2002. Refer to Exhibit 19-6.Compute the Paasche Index for 2001 if the base period is 2000 and the current period is 2002.

A)105.12
B)94.11
C)92.85
D)98.92

Question 46

When a given time series is adjusted for changes in prices,it is called a(n):

A)deflated series.
B)unweighted series.
C)nominal series.
D)cyclical series.

Question 47

Exhibit 19-4.Consider the following data on the prices (in dollars)of three items,A,B,and C,from 2000 through 2002. Refer to Exhibit 19-4.Compute the unweighted price index for the three items for 2002,using 2000 as the base year.

A)98.26
B)98.48
C)109
D)101.46

Question 48

Exhibit 19-6.Three firms X,Y,and Z operate in the same industry,although their products have different features and are priced differently.The following table provides the prices and the quantities sold (in units)during the period 2000-2002. Refer to Exhibit 19-6.Compute the Paasche Index for 2002 if the base period is 2000 and the current period is 2002.

A)94.11
B)106.26
C)130
D)106.07

Question 49

Exhibit 19-5.Firms A,B,and C operate in the market for computers.Each firm's product is popular in the market and distinct from what the other firms offer.The following table shows the prices of laptops from 2005 through 2007. Refer to Exhibit 19-5.Suppose this data was collected from a particular town,where people have a preference for firm C's laptops.If 2005 is used as the base year,which of the following statements will be true?

A)The unweighted price index for 2007 understates the fall in the prices of laptops.
B)The unweighted price index for 2006 overstates the fall in the prices of laptops.
C)The unweighted price index should only use the data for laptops produced by firms A and B to provide an accurate picture of the change in prices.
D)The unweighted price index will better reflect the change in prices over these years than a weighted price index.

Question 50

Exhibit 19-4.Consider the following data on the prices (in dollars)of three items,A,B,and C,from 2000 through 2002. Refer to Exhibit 19-4.If the price of item C in 2002 was 210 instead of 207,calculate the unweighted price index for 2002 for the three items,using 2000 as the base year.

A)98.09
B)100.45
C)102.03
D)101.94

Question 51

When Dana Roberts started her job as a librarian two years ago,her annual salary was $40,000.Although she is very good at her job and is now earning 10% more than what she started with,she notices that new hires in the same field are being offered $43,000 as an annual salary this year.Which of the following statements is most likely to be true?

A)Dana is earning less than $43,000 this year.
B)Real income for librarians in this country has increased,on an average,by $3,000 during the last two years.
C)If inflation in the current year is very high,then it is possible that Dana was better off with $40,000 two years back than the new hires are with a salary of $43,000 today.
D)Adjusted for inflation in the current year,it is likely that Dana's income this year is lower than the income of the new hires.

Question 52

The following table provides the values of the simple price index for watches in a country. If the base year is revised from 2006 to 2007,calculate the updated index for 2008.

A)113.5
B)96.77
C)95.24
D)103.33

Question 53

Exhibit 19-6.Three firms X,Y,and Z operate in the same industry,although their products have different features and are priced differently.The following table provides the prices and the quantities sold (in units)during the period 2000-2002. Refer to Exhibit 19-6.Compute the Laspeyres price index for 2001,using 2000 as the base year.

A)95.64
B)113.60
C)104.56
D)105.19

Question 54

Exhibit 19-3.Consider the following information about the price and the price index of a popular book over three years. Refer to Exhibit 19-3.If the price index in 2011 was 95,calculate the percent change in the price of the book between 2010 and 2011.

A)-12.04%
B)-5%
C)-2.53%
D)-13%

Question 55

A Paasche index with updated weights:

A)is likely to produce a lower estimate than a Laspeyres index when prices are increasing.
B)uses the current period quantities as weights as opposed to the base period quantities used in the Paasche index which does not use updated weights.
C)is likely to produce a lower estimate than a Laspeyres index when prices are decreasing.
D)accounts for inflation but fails to account for changing consumption patterns over time.

Question 56

Which of the following is the correct expression for the Laspeyres price index?

A)
B)
C)
D)

Question 57

Exhibit 19-5.Firms A,B,and C operate in the market for computers.Each firm's product is popular in the market and distinct from what the other firms offer.The following table shows the prices of laptops from 2005 through 2007. Refer to Exhibit 19-5.If 2005 is used as the base year,which of the following statements about the prices of these laptops is true?

A)The prices increased by about 4.8% between 2006 and 2007.
B)The prices were about 8.17% lower in 2007 than in 2005.
C)The prices increased by about 3.36% from 2005 to 2006.
D)The increase in the price of firm C's laptop outweighed the fall in the prices of the others so that the overall index for 2006 was greater than 100.

Question 58

Exhibit 19-4.Consider the following data on the prices (in dollars)of three items,A,B,and C,from 2000 through 2002. Refer to Exhibit 19-4.Compute the unweighted price index for the three items for 2000,using 2001 as the base year.

A)100.08
B)98.56
C)100.85
D)99.92

Question 59

Which of the following statements is true about the Laspeyres and Paasche indices?

A)As long as the evaluation period is the same,the two indices usually yield the same value.
B)The difference in the values of the two indices,if any,can usually account for the varying price levels across periods.
C)The Laspeyres price index uses the current period quantities as weights,as opposed to the base period quantities used by the Paasche price index.
D)The greater the length of time between periods,the higher the chances of variation between the values of the two indices.

Question 60

Exhibit 19-5.Firms A,B,and C operate in the market for computers.Each firm's product is popular in the market and distinct from what the other firms offer.The following table shows the prices of laptops from 2005 through 2007. Refer to Exhibit 19-5.Compute the unweighted price index for the three types of laptops in 2006,using 2005 as the base year.

A)96.63
B)103.48
C)91.83
D)100.96

Question 61

Joanna Williams purchased a one-year Treasury bill at $100.This bond does not have any coupon payment but Joanna will get $105 at maturity.The inflation rate in a year's time is expected to be 1.3%.

A)What is the income yield from this investment?
B)What is the nominal rate of return from this investment?
C)What is the real rate of return from this investment?

Question 62

Using 2008 as the base year,the simple price index for an algebra book in 2009 was computed to be 105.If the price of the book was $50 in 2009,compute the price in the base year.

Question 63

Jake Morris invested $150 in buying a share of ABC Corp. ,a year back,on which he received a dividend of $20.Now when the share is trading at a different price,Jake computes his investment return to be 10%.

A)Compute Jake's income yield from this investment.
B)What is the current price of the share?
C)Interpret the result.

Question 64

Nicole Watson purchased a share of McAllister Inc. ,a year back when it was trading at $75.She also earned a dividend of $4 on this.The price of the same share has now increased to $87.

A)Compute the annual capital gain from this share.
B)Compute the annual income yield from this share.

Question 65

The following table provides the adjusted close prices of the shares of firm X for three consecutive months of the last year. a.Compute the monthly return for May.
B)Compute the monthly return for June.

Question 66

Gulten started her career with an annual salary of $82,000 in 2006.Five years later,in 2011,her salary had increased to $85,000 a year.If the values of the CPI (with a base of 1982-1984)for 2006 and 2011 are 201.6 and 224.9,respectively,compute the increase in Gulten's real income.

A)-7.08 percent
B)3.66 percent
C)15.68 percent
D)92.92 percent

Question 67

Rita Jacob purchased a corporate bond at $650 a year ago.The price of the bond has now increased to $665.

A)What is Rita's capital gains yield from this investment?
B)If her investment return is 7 percent,what coupon payment must she have received?

Question 68

Exhibit 19-7.The following table shows the value of CPI for three years in a country. Refer to Exhibit 19-7.What is the annual inflation rate for 2005?

A)1.46%
B)3.36%
C)4.87%
D)1.8%

Question 69

Which of the following correctly identifies the expression for calculating the inflation rate for period t,based on the CPI?

A)
B)
C)
D)

Question 70

Exhibit 19-7.The following table shows the value of CPI for three years in a country. Refer to Exhibit 19-7.Compute the annual inflation rate for 2004.

A)4%
B)1.46%
C)3.36%
D)4.87%

Question 71

Almas Mohammed paid $50 for a stock of Jones Inc. ,and expects to earn an annual dividend of $5.If the price of the stock increases to $55 in a year's time,compute the real rates of return from this investment if:

A)the expected inflation rate a year from now is 1.25%.
B)the expected inflation rate a year from now is 3%.

Question 72

Katie Jones started her career with an annual salary of $30,000 in 2006.Five years later,in 2011,her salary had increased to $55,000 a year.If the values of the CPI (with a base of 1982-1984)for 2006 and 2011 are 201.6 and 224.9,respectively,compute the increase in Katie's real income.

A)64.34%
B)83.33%
C)105.31%
D)164.34%

Question 73

Which of the following statements is true of the Consumer Price Index (CPI)?

A)It uses the same basket of goods and services as the Producer Price Index.
B)The quantities of items in the current year are used for computing the weights for the index.
C)It is an unweighted price index used to measure inflation.
D)It is based on the prices paid by urban consumers for a representative basket of goods and services.

Question 74

The real return from investing $100 in a stock for a year is computed to be 2%.If the nominal return from this investment is 3.5%,what is the expected inflation rate?

Question 75

The income yield from a one-year infrastructure bond purchased today is 0.5%.Compute the real return from this bond if the inflation rate a year later is expected to be 4% and the capital gains yield is zero.

Question 76

Jones Inc. ,a company manufacturing drills,earned a revenue of $5 million in 2011.This was 6% more than their revenue in 2009.The CPI for 2009 and 2011 was 115 and 122 respectively,while the PPI for 2009 and 2011 was 110 and 114 respectively.Which of the following accurately reflects the real growth in revenues between 2009 and 2011?

A)6%
B)2.65%
C)0.28%
D)10.25%

Question 77

Tammy Welsh has two investment options to choose from.The stocks of both ABC Inc. ,and XYZ Corp. ,are currently trading at $200.ABC Inc. ,is paying a dividend of $10,and is expected to trade at $215 in a year's time.XYZ Corp. ,is paying a higher dividend of $25.However,the price of XYZ's stock is only expected to go up to $203 a year from now.Experts are estimating inflation to be about 2% in a year's time.

A)Which stock should Tammy invest in and why?
B)If the expected inflation rate was revised to 2.5%,would it alter Tammy's choice? Explain your answer.

Question 78

Suppose the price of a slice of pizza increased from $2 in 2009 to $2.25 in 2010,and then to $3 in 2011.

A)Compute the percentage change in the price of a slice of pizza between 2009 and 2011.
B)Compute the simple price index for 2011 if 2009 is the base year.
C)Compute the simple price index for 2009 if 2010 is the base year.

Question 79

Rhea Anderson purchased a corporate bond at $500 a year ago,on which she received a coupon payment of $35.The price of the bond has now gone up to $525.

A)Compute Rhea's capital gains yield.
B)Compute Rhea's income yield.
C)Compute Rhea's investment return.

Question 80

Which of the following is true about the comparison between the CPI and the PPI?

A)Both indices are based on the same basket of goods and services.
B)Sales and excise taxes are included in the PPI,but they are not included in the CPI.
C)The PPI is more commonly used to adjust wages for changes in the cost of living than the CPI.
D)Unlike the CPI that uses prices people pay,the PPI uses the prices measured at the wholesale level.