Exam 6: Measuring the Cost of Living

Table 6-5 This table pertains to an economy with only two goods: books and calculators.The fixed basket consists of 5 books and 10 calculators. -Refer to the Table 6-5.Using 2013 as the base year,what is the consumer price index?

If the prices of New Zealand wool blankets imported into Canada increase,what happens to the GDP deflator and the 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.

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)×100.Suppose an economy produces only two goods,food (f)and clothing (c).Let quantities and prices in Year 0 be qf0,qc0,pf0 and pc0,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 sf and sc 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,wf and wc.Check that their sum is equal to 100. c)Using the notations wf and wc for the two weights,re-write the CPI formula. d)Replace wf and wc 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 make in order to make them identical? e)Did you need to know quantities in Year 1 in order to compute CPI?

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.

Noah puts money in the bank and earns a 7 percent nominal interest rate.What happens if the inflation rate is 3 percent?

A German automobile company produces cars in Canada,some of which are exported to other nations.If the price of these cars increases,what happens to the GDP deflator and the CPI?

Substitution bias in computing the CPI tends to make the CPI overstate the true increase in the cost of living.

In 1969,Don bought a Dodge Dart for $2500.In 2015,he bought a Honda Civic for $22,000.If the price index in 1969 was 39.2 and the price index in 2015 was 190,what is the price of the Dodge Dart in 2015 prices?

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

Babe Ruth's 1931 salary was $80,000.The price index for 1931 is 16 and the price index for the current year is 210.What would Ruth's 1931 salary be equivalent to in the current year?

List the three major problems in using the CPI as a measure of the cost of living.

The price index is 320 in one year and 380 in the next.What was the inflation rate?

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

Which statement best explains whether interest rates are positive or negative?

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

What does the GDP deflator reflect?

Loretta is offered a job in St.John's that pays $50,000.She is also offered a job in Halifax that pays $62 250.Which set of CPIs comes closest to giving both salaries the same purchasing power?

A Brazilian company produces soccer balls in Canada and exports all of them.If the price of the soccer balls increases,what happens to the GDP deflator and the CPI?

The 2015 CPI was 225 and the 1982 CPI was 96.5.How much would you need in 2015 in order to buy what you were able to buy with the $1000 in 1982?