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Exam 6: Measuring the Cost of Living

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Question 81

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

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.

E) C) and D)
F) B) and D)

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Question 82

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Which statement best describes the correlation between nominal and real interest rates?

A) Nominal and real interest rates usually move together.
B) Nominal and real interest rates seldom move together.
C) Nominal and real interest rates often do not move together.
D) Nominal and real interest rates are identical.

E) B) and D)
F) A) and B)

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Question 83

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In the late 1970s,nominal interest rates were high and inflation rates were very high.As a result,what were real interest rates?

Table 6-1 -Refer to the Table 6-1.Suppose that the typical consumer basket consists of 5 bushels of peaches and 10 bushels of pecans and that the base year is 2014.What is the consumer price index for 2014?

If the cost of shelter increases by 10 percent,then,other things the same,how much is the CPI likely to increase?

The price index is 190 in one year and 210 in the next.What is the inflation rate?

What is the purpose of measuring the overall level of prices in the economy?

Suppose an economy consumes only two goods: food and clothing.The following table shows quantities consumed and prices for three years: Year 0 (the base year),Year 1,and Year 2. Item Year 0 Year 1 Year 2 Quantity (units) Price ($ / unit) Quantity (units) Price ($ / unit) Quantity (units) Price ($ / unit) Food 50 5 75 6 80 4 Clothing 100 12 110 11 115 14 a)If the CPI basket is the Year 0 one,compute the expenditure on the basket in years 0,1,and 2. b)Compute the CPIs in years 1 and 2,with Year 0 being the base year. c)For Year 0,compute the shares in expenditure of each of the two goods.Check that the sum of the two shares equals 1.If you multiply those shares by 100,we call them weights.Using the weights,calculate the CPI for Year 0.It should be equal to 100. d)Using the weights,re-calculate the CPIs for the next two years and compare your result with that in part

Why are measurement problems in the consumer price index as an indicator of the cost of living important?

If you currently make $25,000 a year and the CPI rises from 110 today to 150 in five years,then you need to be making $35,000 to have kept pace with consumer price inflation.

If nominal interest rates rise,it must be because inflation rose.

If the nominal interest rate is 8 percent and the rate of inflation is 2 percent,what is the real interest rate?

Which of the following best describes nominal interest rates in the 1970s and 1990s?

You know that a chocolate bar costs 60 cents today.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 1962 prices?

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.

Table 6-3 In the country of Shem,the CPI is calculated using a market basket consisting of 5 apples,4 kg of chicken,3 shirts,and 2 litres of gasoline.The per-unit prices of these goods have been as follows: -Refer to the Table 6-3.What was the inflation rate,as measured by the CPI,between 2014 and 2015?

Which statement best describes the relationship between the nominal interest rate and the real interest rate?

Table 6-3 In the country of Shem,the CPI is calculated using a market basket consisting of 5 apples,4 kg of chicken,3 shirts,and 2 litres of gasoline.The per-unit prices of these goods have been as follows: -Refer to the Table 6-3.What was the inflation rate,as measured by the CPI,between 2012 and 2013?

Why does the GDP deflator give a different rate of inflation than the CPI does?

Ruth collected pension benefits of $220 a month in 2015.If the price index rose from 90 to 105 in the period 2015-2015,what should her pension benefits for 2015 be?