Exam 6: Measuring the Cost of Living

In 1990 Professor Fellswoop made $12 000, in 2000 he earned $24 000, and in 2010 he earned $36 000. If the CPI was 40 in 1990, 60 in 2000, and 100 in 2010, then in real terms, when was Professor Fellswoop's salary highest and lowest?

If nominal interest rates rise, it must be because inflation rose.

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?

Which of the following best characterizes the consumer price index?

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?

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?

In the CPI, how are goods and services weighted?

Tiffany is offered a job in Winnipeg that pays $90 000. She is offered a similar job in Montreal for $60 000. Which of the following sets of CPIs comes closest to giving both salaries the same purchasing power?

Which of the following problems in the construction of the CPI is the creation of the mobile phone most relevant to?

Suppose that the real interest rate was 3 percent and the inflation rate was 1 percent. What happened with the value of savings?

Which of the following is an important difference between the GDP deflator and the consumer price index?

How does a rise in consumer price index affect a typical family?

The formula to calculate CPI between a base year (say, Year 0) and another, specified year, say Year 1, is CPI=(Expenditure on basket in Year 1)/(Expenditure on basket in Year 0). Suppose an economy produces only two goods, food (f) and clothing (c). Let quantities and prices in Year 0 be q^f0, q^c0, p^f0 and p^c0, respectively, and let us adopt similar notations for Year 1, with the caveat that, for CPI, the quantities remain the same as in Year 0. a.Calculate, using the notations in the problem, the expenditure on the basket in Year 0, the expenditure on the basket in Year 1, and the CPI. b.Find the formulas for the share of each of the two goods in the expenditure on the basket in Year 0. Let w^f and w^c be the two shares. Show that the sum of the two shares is equal to 1. Let us multiply each of these shares by 100 and call them weights. Check that their sum is equal to 100. c.Using the notations w^f and w^c for the two weights, re-write the CPI formula. d.Replace w^f and w^c in the formula that you just wrote and compare the result to the formula of definition for CPI. Are they identical? If not, what changes do you need to operate in order to make them identical? e.Did you need to know quantities in Year 1 in order to compute CPI?

Which is likely to have the larger effect on the CPI, a 2 percent increase in food or a 3 percent increase in diamond rings? Explain.

Suppose that increases in the prices of Canadian medical care cause the CPI to increase by 2 percent, while all other prices remain the same. By how much will the GDP deflator increase?

When the overall level of prices in the economy is increasing, what is the economy experiencing?

What is the basket of goods used to construct the CPI?

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?

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

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