Question 1

Core inflation and headline inflation tend to be equal.

Accepted Answer

A) True 
 B)False  False

Question 2

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:

Accepted Answer

A)  about 0.1 per cent 
B)  about 1 per cent 
C)  about 3 per cent 
D)  about 5 per cent 
A)  about 0.1 per cent 
B)  about 1 per cent 
C)  about 3 per cent 
D)  about 5 per cent B

Question 3

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.

Accepted Answer

A) True 
 B)False  False

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

A Korean company produces biscuits in Australia and exports all of them to Russia. If the price of the biscuits increases, then:

Accepted Answer

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 
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 6

For any given year, the CPI is:

Accepted Answer

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 
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 7

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

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

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?

Accepted Answer

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 
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 10

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

Accepted Answer

a. The price of apple pies increased by

Question 11

Which change in the price index shows the greatest rate of inflation: 100 to 110, 150 to 165, or 180 to 198?

Accepted Answer

A)  The first 
B)  The second 
C)  The third 
D)  They are all the same rate 
A)  The first 
B)  The second 
C)  The third 
D)  They are all the same rate

Question 12

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.

Accepted Answer

A) True 
 B)False

Question 13

In 2010, nominal GDP is $500 million and real GDP is $550 million. What is the GDP deflator?

Accepted Answer

A)  -50 
B)  50 
C)  91 
D)  110 
A)  -50 
B)  50 
C)  91 
D)  110

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.

Accepted Answer

A) True 
 B)False

Question 15

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?

Accepted Answer

A)  57 
B)  140 
C)  175 
D)  60 
A)  57 
B)  140 
C)  175 
D)  60

Question 16

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?

Accepted Answer

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

Question 17

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?

Accepted Answer

a. The real mortgage interest rate in 20

Question 18

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?

Accepted Answer

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

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

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?

Accepted Answer

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

Exam 25: Measuring the Cost of Living

Core inflation and headline inflation tend to be equal.

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:

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.

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

A Korean company produces biscuits in Australia and exports all of them to Russia. If the price of the biscuits increases, then:

For any given year, the CPI is:

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

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

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?

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

Which change in the price index shows the greatest rate of inflation: 100 to 110, 150 to 165, or 180 to 198?

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.

In 2010, nominal GDP is $500 million and real GDP is $550 million. What is the GDP deflator?

The CPI is calculated from a basket of goods that every consumer purchases each period, and is based on a household consumer preferences survey.

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?

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?

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?

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

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?

Ten Lessons From Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply, Demand and Government Policies

Consumers, Producers and the Efficiency of Markets

Application: The Costs of Taxation

Application: International Trade

Externalities

Public Goods and Common Resources

The Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Business Strategy

Competition Policy

Monopolistic Competition

The Markets for the Factors of Production

Earnings, Unions and Discrimination

Income Inequity and Poverty

The Theory of Consumer Choice

Frontiers of Microeconomics

Measuring a Nations Income

Production and Growth

Saving, Investment and the Financial System

The Natural Rate of Unemployment

The Monetary System

Inflation: Its Causes and Costs

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Trade-Off Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

Filters