Question 1

If the cost of transportation and the cost of food both increase by 30 percent, other things the same, how much is the CPI likely to increase?

Accepted Answer

A) by about 3 percent 
B) by about 6 percent 
C) by about 9 percent 
D) by about 11 percent

Question 2

In the country of Hyrkania, the CPI in 2005 was 140 and the CPI in 2006 was 154. Jake, a resident of Hyrkania, borrowed money in 2005 and repaid the loan in 2006. If the nominal interest rate on the loan was 14 percent, what was the real interest rate?

Accepted Answer

A) 18 percent 
B) 14 percent 
C) 10 percent 
D) 4 percent

Question 3

Suppose that dairy products have risen in price less than prices in general over the past several years. Which of the following problems in the construction of the CPI is this price increase most relevant to?

Accepted Answer

A) substitution bias 
B) introduction of new goods 
C) unmeasured quality change 
D) income bias

Question 4

There is no longer much debate among economists concerning the severity of and the solution to the problems in using the CPI to measure the cost of living.

Accepted Answer

A) True 
 B)False

Question 5

Ingrid takes a job in 1981 at a salary of $10 000. By 2010, she has been promoted, with a salary of $50 000. If the price index in 1981 is 50, and the price index in 2010 is 180, what is Ingrid's 2010 salary in 1981 dollars?

Accepted Answer

A) $13 889 
B) $18 000 
C) $26 000 
D) $36 000

Question 6

In 1964 in London, Ontario, one could buy a chili dog and a root beer for $1.25; today the same chili dog and root beer cost $3.75. Which of the following sets of CPIs would mean that the cost in today's dollars was the same as in 1964?

Accepted Answer

A) 60 in 1964 and 141.6 today 
B) 75 in 1964 and 126.4 today 
C) 80 in 1964 and 112 today 
D) 90 in 1964 and 270 today

Question 7

Which of the following best describes the relationship between inflation and interest rates?

Accepted Answer

A) There is no relationship between inflation and interest rates. 
B) The interest rate is determined by the rate of inflation. 
C) In order to fully understand inflation, we need to know how to correct for the effects of interest rates. 
D) In order to fully understand interest rates, we need to know how to correct for the effects of inflation.

Question 8

If the nominal interest rate is 5 percent and the inflation rate is 2 percent, then the real interest rate is 3 percent.

Accepted Answer

A) True 
 B)False

Question 9

You know that a chocolate bar cost five cents in 1962. You also know the CPI for 1962 and the CPI for today. Which of the following would you use to compute the price of the candy bar in today's prices?

Accepted Answer

A) 5 cents * (1962 CPI/ today's CPI) 
B) 5 cents * (1962 CPI/(today's CPI - 1962 CPI)) 
C) 5 cents * (today's CPI/1962 CPI) 
D) 5 cents * today's CPI - five cents * 1962 CPI

Question 10

Most, but not all, athletic apparel sold in Canada is imported from other nations. If the price of athletic apparel increases, what will happen to the GDP deflator?

Accepted Answer

A) It will increase less than will the consumer price index. 
B) It will increase more than will the consumer price index. 
C) It will not increase, but the consumer price index will increase. 
D) It will increase, but the consumer price index will not increase.

Question 11

If the current-year CPI is 140, then, since the base year, the price level has increased 40 percent.

Accepted Answer

A) True 
 B)False

Question 12

The following table shows the consumption goods categories that Statistics Canada uses to compute the consumer price index, their weights as percentages in a typical consumer's total expenditure, as well as some hypothetical prices of those generic goods. Since the weights are adjusted such that their sum is 100, the year 1 prices are given as price ratios p¹/p⁰, where p⁰ is the base year price. a.Calculate the consumer price index in Year 1 and Year 2. b.Calculate the inflation rate in Year 1, Year 2, and between Year 1 and Year 2. c.Explain how the weights in column 2 were determined. Discuss the meaning of "Price of food."

Accepted Answer

The answer of The following table shows the consumption goods...

Question 13

Ms. Smith borrowed $1000 from her bank for one year at an interest rate of 10 percent per year. During that year the price level went up by 15 percent. What happens when the loan is repaid?

Accepted Answer

A) Ms. Smith will repay the bank fewer dollars than she initially borrowed. 
B) Ms. Smith's repayment will give the bank less purchasing power than it originally loaned her. 
C) Ms. Smith's repayment will give the bank greater purchasing power than it originally loaned her. 
D) Ms. Smith's repayment will give the bank the same purchasing power that it originally loaned her.

Question 14

For any given year, what is the CPI?

Accepted Answer

A) 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 
B) the price of the basket of goods and services in the given year divided by the price of the basket in the previous year, then multiplied by 100 
C) 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 
D) the price of the basket of goods and services in the previous year divided by the price of the basket in the given year, then multiplied by 100

Question 15

The inflation rate is computed as 100 * (the current year CPI - the CPI of the previous year) ÷ the CPI of the previous year.

Accepted Answer

A) True 
 B)False

Question 16

Henry Ford paid his workers $5 a day in 1914 when the CPI was 10. Today with the price index at 177 the $5 a day is worth $88.50.

Accepted Answer

A) True 
 B)False

Question 17

Suppose the price of a litre of milk rises from $1 to $1.25 and the price of a T-shirt rises from $8 to $10. If the CPI rises from 150 to 175, what will people likely buy?

Accepted Answer

A) more milk and more T-shirts 
B) more milk and fewer T-shirts 
C) less milk and more T-shirts 
D) less milk and fewer T-shirts

Question 18

Which change in the price index shows the greatest rate of inflation?

Accepted Answer

A) 80 to 100 
B) 100 to 120 
C) 150 to 170 
D) 200 to 220

Question 19

Which of the following happened in the early 2000s?

Accepted Answer

A) Real interest rates were high, and nominal interest rates were low. 
B) Real interest rates were low, and nominal interest rates were high. 
C) Both real interest rates and nominal interest rates were high. 
D) Both real interest rates and nominal interest rates were low.

Question 20

The price index is 320 in one year and 360 in the next. What was the inflation rate?

Accepted Answer

A) 6.7 percent 
B) 8 percent 
C) 11.1 percent 
D) 12.5 percent

Exam 6: Measuring the Cost of Living

If the cost of transportation and the cost of food both increase by 30 percent, other things the same, how much is the CPI likely to increase?

In the country of Hyrkania, the CPI in 2005 was 140 and the CPI in 2006 was 154. Jake, a resident of Hyrkania, borrowed money in 2005 and repaid the loan in 2006. If the nominal interest rate on the loan was 14 percent, what was the real interest rate?

Suppose that dairy products have risen in price less than prices in general over the past several years. Which of the following problems in the construction of the CPI is this price increase most relevant to?

There is no longer much debate among economists concerning the severity of and the solution to the problems in using the CPI to measure the cost of living.

Ingrid takes a job in 1981 at a salary of $10 000. By 2010, she has been promoted, with a salary of $50 000. If the price index in 1981 is 50, and the price index in 2010 is 180, what is Ingrid's 2010 salary in 1981 dollars?

In 1964 in London, Ontario, one could buy a chili dog and a root beer for $1.25; today the same chili dog and root beer cost $3.75. Which of the following sets of CPIs would mean that the cost in today's dollars was the same as in 1964?

Which of the following best describes the relationship between inflation and interest rates?

If the nominal interest rate is 5 percent and the inflation rate is 2 percent, then the real interest rate is 3 percent.

You know that a chocolate bar cost five cents in 1962. You also know the CPI for 1962 and the CPI for today. Which of the following would you use to compute the price of the candy bar in today's prices?

Most, but not all, athletic apparel sold in Canada is imported from other nations. If the price of athletic apparel increases, what will happen to the GDP deflator?

If the current-year CPI is 140, then, since the base year, the price level has increased 40 percent.

Ms. Smith borrowed $1000 from her bank for one year at an interest rate of 10 percent per year. During that year the price level went up by 15 percent. What happens when the loan is repaid?

For any given year, what is the CPI?

The inflation rate is computed as 100 * (the current year CPI - the CPI of the previous year) ÷ the CPI of the previous year.

Henry Ford paid his workers $5 a day in 1914 when the CPI was 10. Today with the price index at 177 the $5 a day is worth $88.50.

Suppose the price of a litre of milk rises from $1 to $1.25 and the price of a T-shirt rises from $8 to $10. If the CPI rises from 150 to 175, what will people likely buy?

Which change in the price index shows the greatest rate of inflation?

Which of the following happened in the early 2000s?

The price index is 320 in one year and 360 in the next. What was the inflation rate?