Exam 24: Measuring the Cost of Living

Suppose 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 which is cheaper to operate than gasoline engines. Which problems in the construction of the CPI does this situation represent?

The CPI is always 1 in the base year.

The U.S. income tax system is completely indexed for inflation.

If the CPI was 90 in 1975 and is 225 today, then $100 today purchases the same amount of goods and services as

Price indexes allow comparisons of dollar figures over time and provide us a sense of how the economy is changing.

By keeping the basket of goods and services the same when computing the CPI, the Bureau of Labor Statistics isolates the effects of price changes from the effect of any quantity changes that might be occurring at the same time.

For a country like the United States, explain why the CPI would increase at a faster rate than the GDP deflator during periods of oil and gasoline price increases.

If the real value of an item bought ten years ago is less than it's nominal value at that time, what can one infer about the change in the overall price level during this ten year period?

The consumer price index is used to monitor changes in an economy's production of goods and services over time.

Each week, the Bureau of Labor Statistics computes and reports the consumer price index.

Consumer spending in what category is the largest component of the CPI?

Scenario 24-3 A small economy produced and consumed goods X and Y in 2010 and 2011 in the amounts shown in the table below. Assume that the market basket for the CPI is defined in the base year. -Refer to Scenario 24-3. Using 2010 as the base year, what is the CPI in each year?

If you currently make $25,000 a year and the CPI rises from 110 today to 150 in five years, then you need to be making $43,333.33 in five years to have kept pace with consumer price inflation.

In the CPI, goods and services are weighted according to

The CPI is calculated

Scenario 24-2 ​ Suppose the residents of Mediaville spend all of their income on books, CDs, and DVDs. In 2009, they buy 400 books for $3,200, 200 CDs for $1,400, and 100 DVDs for $900. In 2010, they buy 360 books for $3,240, 250 CDs for $1,500, and 125 DVDs for $1,250. Assume that the market basket for the CPI is defined in the base year. -Refer to Scenario 24-2. Using 2009 as the base year, what is the CPI in each year?

Abjihit deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Abjihit withdraws his $105. If inflation was 7 percent during the year the money was deposited, then Abjihit's purchasing power has increased by 2 percent.

Suppose the typical basket for the calculation of the CPI includes one computer. Since computers have gotten better over time as a result of technological change, what problem does this create for calculating the CPI?

If the CPI was 170 in 1998 and was 187 in 1999, what was the inflation rate in 1999?

If the CPI increased from 215 to 218 between the years 2012 and 2013, while the nominal interest rate increased from 3.25% to 3.80%, what is the real interest rate in 2013?