Exam 6: Measuring the Cost of Living

Jay and Joyce meet George, the banker, to work out the details of a mortgage. They all expect that inflation will be 2 percent over the term of the loan, and they agree on a nominal interest rate of 6 percent. As it turns out, the inflation rate is 5 percent over the term of the loan. a.What was the expected real interest rate? b.What was the actual real interest rate? c.Who benefited and who lost because of the unexpected inflation?

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?

How do the GDP deflator and the consumer price index compare to each other?

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?

Suppose that the CPI is currently 200 and was 40 in 1950. Then, according to the CPI, $1 in 1950 purchased the same amount of goods and services as what amount today?

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?

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?

Which of the following goods are supposed to be included in the CPI?

Which of the following makes up the smallest category of consumer spending in Canada?

In the 1970s, nominal interest rates were high and real interest rates were low. In the 1990s, nominal interest rates were low and real interest rates were high.

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

Ruth collected pension benefits of $220 a month in 2008. If the price index rose from 90 to 105 in the period 2009-2010, what should her pension benefits for 2010 be?

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?

Compute how much each of the following is worth in terms of today's dollars using 177 as the price index for today. a.In 1926 the CPI was 17.7 and the price of a movie ticket was $0.25 b.In 1932 the CPI was 13.1 and a cook earned $15.00 a week c.In 1943 the CPI was 17.4 and a gallon of gas cost $0.19

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?

If the nominal interest rate is 10 percent and the rate of inflation is 3 percent, what is the real interest rate?

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?

What does the nominal interest rate tell you?

Food, health and personal care, and clothing and footwear account for over 50 percent of the goods and services in the CPI basket of goods.

Which of the following best describes the evolution of the GDP deflator and the consumer price index over the past decades?