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Exam 24: Measuring the Cost of Living

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Question 1

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The steps involved in calculating the consumer price index and the inflation rate, in order, are as follows:

A) Choose a base year, update the basket, find the prices, estimate the basket's cost, compute the index, and compute the inflation rate.
B) Choose a base year, fix the basket, find the prices, compute the inflation rate, compute the basket's cost, and compute the index.
C) Fix the basket, find the prices, compute the basket's cost, choose a base year and compute the index, and compute the inflation rate.
D) Fix the basket, find the prices, compute the inflation rate, compute the basket's cost, and choose a base year and compute the index.

E) A) and B)
F) A) and C)

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Question 2

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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 A.

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Question 3

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If the real interest rate is 6.8% and the inflation rate is 3.9%, what is the nominal interest rate?

As long as prices are rising over time, then

What basket of goods and services is used to construct the CPI?

Suppose the CPI in 1950 was 24.1 and the CPI in 1975 was 53.8.​ When Ken's income rose from $10,000 per year in 1950 to $20,000 per year in 1970, Ken's standard of living improved between 1950 and 1970.

Consumer price index = (Price of basket of goods and services in current year / Price of basket in base year ) x 100

Scenario 24-2 ​ Suppose the residents of Mediaville spend all of their income on books, CDs, and DVDs. In 2009, they buy 400 books for $3,200, 200 CDs for $1,400, and 100 DVDs for $900. In 2010, they buy 360 books for $3,240, 250 CDs for $1,500, and 125 DVDs for $1,250. Assume that the market basket for the CPI is defined in the base year. -Refer to Scenario 24-2. Using 2010 as the base year, what is the CPI in each year?

Which of the following is the correct formula for calculating the consumer price index?

Scenario 24-3 A small economy produced and consumed goods X and Y in 2010 and 2011 in the amounts shown in the table below. Assume that the market basket for the CPI is defined in the base year. -Refer to Scenario 24-3. Using 2011 as the base year, what is the CPI in each year?

When ranking movies by nominal box office receipts, what important fact is overlooked?

The Bureau of Labor Statistics surveys consumers to determine a fixed basket of goods.

The CPI for 2008 is computed by dividing the price of the basket of goods and services in 2008 by the price of the basket of goods and services in the base year, then multiplying by 100.

Scenario 24-2 ​ Suppose the residents of Mediaville spend all of their income on books, CDs, and DVDs. In 2009, they buy 400 books for $3,200, 200 CDs for $1,400, and 100 DVDs for $900. In 2010, they buy 360 books for $3,240, 250 CDs for $1,500, and 125 DVDs for $1,250. Assume that the market basket for the CPI is defined in the base year. -Refer to Scenario 24-2. What are the prices of books, CDs, and DVDs in 2010?

An increase in the price of bread produced domestically will be reflected in

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. $\begin{array} { | l | l | l | } \hline \text { Month } & \text { Price of Chips } & \text { Price of Salsa } \\\hline \text { October } & \$ 2.50 & \$ 2.50 \\\hline \text { November } & \$ 2.40 & \$ 2.55 \\\hline \text { December } & \$ 2.60 & \$ 2.75 \\\hline\end{array}$ -Calculate the inflation rate for December.

One problem with the consumer price index stems from the fact that, over time, consumers tend to buy larger quantities of goods that have become relatively less expensive and smaller quantities of goods that have become relatively more expensive. This problem is called

Inflation can be measured using either the GDP deflator or the consumer price index.

If the quality of a good deteriorates from one year to the next while its price remains the same, then the value of a dollar falls.

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 the consumer price index is 8.5 percent higher in Year 3 than in Year 1. Then Lee's food expenditures for Year 2 in Year 3 dollars amount to