Question 1

In the CPI,how are goods and services weighted?

Accepted Answer

A)  according to how much consumers buy of each item 
B)  according to whether the goods and services are necessities or luxuries 
C)  according to the levels of production of the goods and services in the domestic economy 
D)  according to the expenditures on them in the GDP national income accounts

Question 2

Suppose the quality of lawn mowers,which are part of the CPI basket,has improved,while their price has remained the same.If Statistics Canada wants to adjust the CPI so that the effect of better quality on the cost of living is accounted for,what should Statistics Canada do?

Accepted Answer

A)  It should keep the CPI unchanged,because the price has not changed. 
B)  It should decrease the CPI,because better quality means lower maintenance costs. 
C)  It should increase the CPI,because higher quality means higher value. 
D)  It should keep the CPI unchanged,because lower maintenance costs are offset by higher value.

Question 3

The price index in 2014 is 120,and in 2015 it is 127.2.What is the inflation rate?

Accepted Answer

A)  5 percent 
B)  6 percent 
C)  7.2 percent 
D)  8.4 percent

Question 4

Canadians spend about 27 percent of their total expenditures on housing.If the price of housing increases by 10 percent,by how much does the CPI increase?

Accepted Answer

A)  0.27 percent 
B)  2.7 percent 
C)  27 percent 
D)  270 percent

Question 5

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

Accepted Answer

A)  -7 percent 
B)  -5 percent 
C)  5 percent 
D)  7 percent

Question 6

In 1949,the city of Sherbrooke,Quebec,built a hospital for about $500,000.In 1987,the city restored its courthouse for about $2.4 million.A price index for nonresidential construction was 14 in 1949,92 in 1987,and 114.5 in 2015.According to these numbers,what approximately did the hospital cost?

Accepted Answer

A)  $3.6 million in 2015 dollars,which is less than the cost of the courthouse restoration in 2015 dollars 
B)  $3.6 million in 2015 dollars,which is more than the cost of the courthouse restoration in 2015 dollars 
C)  $4.1 million in 2015dollars,which is less than the cost of the courthouse restoration in 2015 dollars 
D)  $4.1 million in 2015 dollars,which is more than the cost of the courthouse restoration in 2015 dollars

Question 7

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 8

Which statement best characterizes the consumer price index?

Accepted Answer

A)  It is a measure of a nation's standard of living. 
B)  It shows production of consumer goods. 
C)  It measures the increase in the prices of all final goods and services produced within the borders of a country. 
D)  It is an imperfect measure of the cost of living.

Question 9

If the cost of transportation and the cost of food both increase by 25 percent,then,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 10

When the quality of a good improves,what happens to the purchasing power of the dollar?

Accepted Answer

A)  It increases,so the CPI overstates the change in the cost of living if the quality change is not accounted for. 
B)  It increases,so the CPI understates the change in the cost of living if the quality change is not accounted for. 
C)  It decreases,so the CPI overstates the change in the cost of living if the quality change is not accounted for. 
D)  It decreases,so the CPI understates the change in the cost of living if the quality change is not accounted for.

Question 11

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 2015 as the base year,what is the inflation rate?

Accepted Answer

A)  13.3 percent for 2014 and 14.8 percent for 2015 
B)  13.3 percent for 2014 and 55.0 percent for 2015 
C)  35.0 percent for 2014 and 14.8 percent for 2015 
D)  35.0 percent for 2014 and 55.0 percent for 2015

Question 12

Suppose that Canadian mining companies purchase German-made ore trucks at a reduced price.By itself,what will this do to the GDP deflator and the consumer price index?

Accepted Answer

A)  The GDP deflator and the consumer price index will fall. 
B)  The GDP deflator and the consumer price index will be unaffected. 
C)  The GDP deflator will be unaffected,but the consumer price index will fall. 
D)  The GDP deflator will fall,but the consumer price index will be unaffected.

Question 13

Suppose that the nominal interest rate is 5 percent and the expected inflation rate is 3 percent.What happens with the value of savings?

Accepted Answer

A)  The dollar value of savings increases by 8 percent,and the value of savings measured in goods is expected to increase by 3 percent. 
B)  The dollar value of savings increases by 8 percent,and the value of savings measured in goods is expected to increase by 5 percent. 
C)  The dollar value of savings increases by 5 percent,and the value of savings measured in goods is expected to increase by 2 percent. 
D)  The dollar value of savings increases by 5 percent,and the value of savings measured in goods is expected to increase by 3 percent.

Question 14

Suppose that dairy products have risen in price less than prices in general over the past several years.Which problem 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 15

Babe Ruth,the famous baseball player,earned $80,000 in 1931.Today,the best baseball players can earn 200 times as much as Babe Ruth in 1931.Are the best baseball players better off than Babe Ruth?

Accepted Answer

A)  Yes,the best baseball players today are better off than Babe Ruth was in 1931 because they earn much more. 
B)  No,because prices have also risen. 
C)  It cannot be determined because one cannot make judgments about changes in the standard of living based on changes in prices and changes in incomes. 
D)  It cannot be determined without additional information regarding increases in prices since 1931.

Question 16

Ethel purchased a bag of groceries in 1970 for $8.She purchased the same bag of groceries in 2015 for $25.If the price index was 38.8 in 1970 and 180 in 2015,what's the price of a 1970 bag of groceries in 2015 prices?

Accepted Answer

A)  $25.00 
B)  $29.11 
C)  $37.11 
D)  $38.80

Question 17

Which situation is described by the term "inflation"?

Accepted Answer

A)  The overall level of prices in the economy is increasing. 
B)  Incomes in the economy are increasing. 
C)  Stock market prices are rising. 
D)  Nominal interest rates in the economy are rising.

Question 18

Scenario 6-1
Grant Smith was a doctor.In 1944,he made $12,000.His daughter,Lisa Smith,is also a doctor.Last year she made $275,000.The price index in 1944 was 17.6 and the price index last year was 200.
-Refer to the Scenario 6-1.What was the approximate ratio of Grant's real income to Lisa's real income?

Accepted Answer

A)  1:2 
B)  3:5 
C)  7:10 
D)  7.5:10

Question 19

From October 2014 to October 2015,the CPI in country A rose from 116.5 to 119.8.In country B,it rose from 97.2 to 102.3.What were the inflation rates in the two countries?

Accepted Answer

A)  3.3 percent in A and 6.7 percent in B 
B)  3.3 percent in A and 5.2 percent in B 
C)  2.8 percent in A and 6.7 percent in B 
D)  2.8 percent in A and 5.2 percent in B

Question 20

Table 6-1 
-Refer to the Table 6-1.What was the inflation rate in 2015?

Accepted Answer

A)  4 percent 
B)  5 percent 
C)  20 percent 
D)  25 percent

Exam 6: Measuring the Cost of Living