Topic_2_Part_2: Measuring the Cost of Living - B

The CPI is a measure of the overall cost of the goods and services bought by

• a typical firm.
• the government.
• a typical consumer.
• All of the above are correct.

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

• a random sample of all goods and services produced in the economy
• the goods and services that are typically bought by consumers as determined by government surveys
• only food, clothing, transportation, entertainment, and education
• the least expensive and the most expensive goods and services in each major category of consumer expenditures

Because the CPI is based on a fixed basket of goods, the introduction of new goods and services in the economy causes the CPI to overestimate the cost of living.  This is so because

• new goods and services are always of higher quality than existing goods and services.
• new goods and services cost less than existing goods and services.
• new goods and services cost more than existing goods and services.
• when a new good is introduced, it gives consumers greater choice, thus reducing the amount they must spend to maintain their standard of living.

Which of the following statements about real and nominal interest rates is correct?

• Real interest rates can be either positive or negative, but nominal interest rates must be positive.
• Real interest rates and nominal interest rates must be positive.
• Real interest rates must be positive, but nominal interest rates can be either positive or negative.
• Real interest rates and nominal interest rates can be either positive or negative.

If the nominal interest rate is 8 percent and the real interest rate is 5.5 percent, then the inflation rate is

• -2.5 percent.
• 0.45 percent.
• 2.5 percent.
• 13.5 percent.

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.

Which of the following best describes what is necessary for consumers to maintain the same standard of living over time if there is inflation?

• a. Nominal incomes are the same over time

• b. Consumer incomes must increase at a faster rate than the official rate of inflation

• c. Government spending must increase at the same rate as the rate of inflation

• d. Consumer incomes must increase at least the same rate as the official rate of inflation

If the CPI is 93 in 2014 and 97 in 2015, calculate the rate of inflation from 2014 to 2015.

• 4%

• 4.3%

• 4.12%

• 5.2%

Which problem in the construction of the CPI might be illustrated by:

The invention of cell phones

• Unmeasured quality change

• Introduction of new goods

• Substitution Bias

• Others

Starbucks raises the price of Frappuccino - that affects:

• Only CPI

• Only GDP Deflator

• both CPI and GDP Deflator