Measuring the Cost of Living-A

An increase in the price of helicopters purchased by the UK armed forces is captured by the UK CPI

• True

• False

In 1989, the CPI was 124.0. In 1990, it was 130.7. What was the rate of inflation over this period?

• 30.7 percent

• 5.4 percent

• 5.1 percent

• You can't tell without knowing the base year.

The "basket" on which the CPI is based is composed of

• consumer production.

• raw materials purchased by firms.

• products purchased by the typical consumer.

• total current production.

• none of these answers.

If there is an increase in the price of apples which causes consumers to purchase fewer kilograms of apples and more kilograms of oranges, the CPI will suffer from

• base year bias.

• bias due to unmeasured quality change.

• bias due to the introduction of new goods.

• substitution bias.

The consumer price index is used to monitor changes in an economy’s production of goods and services over time.

• True

• False

The inflation rate is calculated

• by determining the change in the price index from the preceding period

• by adding up the price increases of all goods and services.

• by computing a simple average of the price increases for all goods and services.

• by determining the percentage increase in the price index from the preceding period