Exam 25: Measuring the Cost of Living

Masako buys a house in 1999. She obtains a mortgage that carries an annual interest rate of 12 per cent, and makes payments of $880 per month. The CPI in 1999 is 100, in 2000 it is 110, and in 2001 it is 120. What is the inflation rate in 2001?

Henry and Ellen meet George, the banker, to work out the details of a loan. George, Ellen and Henry all expect that inflation will be 5 per cent over the term of the loan, and they agree on a nominal interest rate of 10 per cent. In actuality, the inflation rate is 8 per cent over the term of the loan. a. What is the expected real interest rate? b. What is the actual real interest rate? c. Who benefits and who loses because of the unexpected inflation?

An increase in the price of domestically produced industrial robots will be reflected in:

Susan Webster deposits $1000 for a year in a bank account that pays an annual interest rate of 4 per cent. If the inflation rate is 6 per cent, then Susan's purchasing power has approximately:

The CPI can be used to turn dollar figures into meaningful measures of purchasing power.

The interest rate a bank pays is the nominal interest rate, and the interest rate adjusted for inflation is the real interest rate.

The producer price index measures: The producer price index measures:

Which of the following is the most accurate statement about the relationship between the nominal interest rate and the real interest rate?

Karl's 1950 salary was $15 000. The CPI is 27 for 1950, and 150 for 2009. What is Karl's salary in 2009 dollars?

An important difference between the GDP deflator and the CPI is that:

The substitution bias refers to choices consumers make between the categories of goods that form the basis for the CPI calculation.

If the CPI were 100 in the base year and 110 in the following year, the inflation rate would be:

In 1984, Allen buys a new stereo system at the Modern technology Hi-Fi store. He is told by the salesman that Mr Steve Jobs Bose has invented a computer that allows you to do complex calculations and word processing in your home. Allen buys an Apple Mac. This purchase illustrates which of the following problems in the CPI's construction?

The GDP deflator is the ratio of nominal GDP to real GDP.

The base year for the CPI is updated:

The RBA uses headline inflation as the basis for its cash rate decision.

If the nominal interest rate is 10 per cent and the rate of inflation is 15 per cent, the real interest rate is:

When the price of oil rises, the GDP deflator rises by much more than does the CPI, since oil and oil products are a much larger share of consumer spending than they are of GDP.

If the 2012 CPI increased by 5 per cent, economists would estimate that the true cost of living had increased by about 4 per cent.

If nominal GDP increased by 11 per cent while real GDP increased by only 5 per cent, then: