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Exam 24: Measuring the Cost of Living

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Question 81

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Table 24-8 The table below lists annual consumer price index and inflation rates for a country over the period 2010-2013. Assume the year 2010 is used as the base year. $\begin{array} { | l | l | l | } \hline \text { Year } & \begin{array} { l } \text { Consumer } \\\text { Price Index }\end{array} & \text { Inflation Rate } \\\hline 2010 & 100 & \\\hline 2011 & 120 & \mathrm {~B} \\\hline 2012 & \mathrm {~A} & 15 \% \\\hline 2013 & 134 & \mathrm { C } \\\hline\end{array}$ -Refer to Table 24-8. Calculate the missing value that belongs in space C.

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Question 82

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Table 24-2 The following table pertains to Wiskancia, an economy in which the typical consumer's basket consists of 15 pounds of apples and 7 teddy bears. ​ ​ $\begin{array} { | c | c | c | } \hline \text { Year } & \begin{array} { c } \text { Price of Apples } \\\text { (Dollars per pound) }\end{array} & \begin{array} { c } \text { Price of Teddy bears } \\\text { (Dollars per toy) }\end{array} \\\hline 1 & 14 & 7 \\\hline 2 & 12 & 5 \\\hline 3 & 15 & 9 \\\hline\end{array}$ -Refer to Table 24-2. The cost of the basket

A) decreased from Year 1 to Year 2 and increased from Year 2 to Year 3.
B) increased from Year 1 to Year 2 and decreased from Year 2 to Year 3.
C) increased from Year 1 to Year 2 and increased from Year 2 to Year 3.
D) decreased from Year 1 to Year 2 and decreased from Year 2 to Year 3.

E) A) and C)
F) None of the above

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Question 83

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Which of the following is correct?

If the nominal interest rate is 8.3% and the inflation rate is 4.4%, what is the real interest rate?

The table below lists the prices of chips and salsa for the months of October, November, and December. Assume that the typical consumer buys 8 bags of chips and 4 jars of salsa each month, and that October is the base period. $\begin{array} { | l | l | l | } \hline \text { Month } & \text { Price of Chips } & \text { Price of Salsa } \\\hline \text { October } & \$ 2.50 & \$ 2.50 \\\hline \text { November } & \$ 2.40 & \$ 2.55 \\\hline \text { December } & \$ 2.60 & \$ 2.75 \\\hline\end{array}$ -Refer to Table 24-6. Calculate the consumer price index for February and March.

If the consumer price index is 120 in 2009 and 139.2 in 2010, then the rate of inflation for 2010 is 39.2 percent.

If Year 1 is the base year and Year 2 is the following year, then the inflation rate in Year 2 equals

The table below lists the prices of chips and salsa for the months of October, November, and December. Assume that the typical consumer buys 8 bags of chips and 4 jars of salsa each month, and that October is the base period. $\begin{array} { | l | l | l | } \hline \text { Month } & \text { Price of Chips } & \text { Price of Salsa } \\\hline \text { October } & \$ 2.50 & \$ 2.50 \\\hline \text { November } & \$ 2.40 & \$ 2.55 \\\hline \text { December } & \$ 2.60 & \$ 2.75 \\\hline\end{array}$ -Refer to Table 24-6. Calculate the inflation rate for February.

Table 24-4 Lee's expenditures on food for three consecutive years, along with other values, are presented in the following table. ​ ​ -Refer to Table 24-4. Suppose Will's Year 1 food expenditures in Year 3 dollars amounted to $9,590. Suppose also that the real interest rate in Year 3 was 6 percent. Then, in Year 3,

The group of goods and services used to compute the GDP deflator changes automatically over time, but the group of goods and services used to compute the CPI does not.

The inflation rate reported in the news is usually calculated from the GDP deflator rather than the consumer price index.

If the price of Italian shoes imported into the United States increases, then

When some dollar amount is automatically corrected for inflation by law or contract, the amount is said to be indexed for inflation.

Substitution bias occurs because the CPI ignores the possibility of consumer substitution toward goods that have become relatively less expensive.

One of the widely acknowledged problems with using the consumer price index as a measure of the cost of living is that the CPI

The real interest rate measures the change in dollar amounts.

The nominal interest rate tells you

The inflation rate is the absolute change in the price level from the previous period.

The CPI and GDP deflator usually tell two different stories about how quickly prices are rising.

Explain how the introduction of new goods might bias the calculation of the consumer price index.