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Exam 21: Measuring the Cost of Living

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Question 31

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Inflation can be measured by all of the following except the

A) All of these answers are used to measure inflation.
B) Consumer prices index.
C) Producer prices index.
D) GDP deflator.
E) Finished goods price index.

F) None of the above
G) A) and B)

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Question 32

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List the three major problems in using the CPI as a measure of the cost of living.

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(1) Substitution bias. The CPI ignores t...

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Question 33

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If the nominal interest rate is 7 per cent and the inflation rate is 3 per cent, then the real interest rate is

In a simple economy, people consume only 2 goods, food and clothing. The market basket of goods used to compute the CPI consists of 50 units of food and 10 units of clothing. $\begin{array}{|l|c|c|}\hline & \text { Food } & \text { Clothing } \\\hline 2013 \text { price per unit } & € 4 & € 10 \\\hline 2014 \text { price per unit } & € 6 & € 20 \\\hline\end{array}$ a. What is the percentage increases in the price of food and in the price of clothing? b. What is the percentage increase in the CPI? c. Do these price changes affect all consumers to the same extent? Explain.

It is impossible for real interest rates to be negative.

If your wage rises from €500 per week to €625 per week while the Consumer Prices Index (CPI) rises from 112 to 121, you should feel an increase in your standard of living.

Under which of the following conditions would you prefer to be the lender?

If the CPI has a value of 150 today and the base year is 2000, then it costs

If lenders demand a real rate of return of 4 per cent and they expect inflation to be 5 per cent, then they should charge 9 per cent interest when they extend loans.

The table shows the prices and the quantities consumed in Carnivore Country. The base year is 2013. This means that 2013 is the year the typical basket was determined so the quantities consumed in 2013 are the only quantities needed to calculate the CPI in each year. ? $\begin{array}{l}\text { Table }\\\begin{array}{|c|c|c|c|c|}\hline \text { Year } & \begin{array}{c}\text { Price of } \\\text { beef }\end{array} & \begin{array}{c}\text { Quantity of } \\\text { beef }\end{array} & \begin{array}{c}\text { Price of } \\\text { pork }\end{array} & \begin{array}{c}\text { Quantity of } \\\text { pork }\end{array} \\\hline 2013 & € 2.00 & 100 & € 1.00 & 100 \\\hline 2014 & 2.50 & 90 & 0.90 & 120 \\\hline 2015 & 2.75 & 105 & 1.00 & 130 \\\hline\end{array}\end{array}$ Refer to the table above. What is the value of the basket in the base year?

Because an increase in petrol prices causes consumers to ride their bikes more and drive their cars less, the Consumer Prices Index (CPI) tends to underestimate the cost of living.

Jay and Joyce meet George, the banker, to work out the details of a mortgage. They all expect that inflation will be 2 per cent over the term of the loan, and they agree on a nominal interest rate of 6 per cent. As it turns out, the inflation rate is 5 per cent over the term of the loan. a. What was the expected real interest rate? b. What was the actual real interest rate? c. Who benefited and who lost because of the unexpected inflation?

Which item would receive the most weight in the consumer price index?

In 2012, the CPI was 124.0 in a country. In 2013, it was 130.7. What was the rate of inflation over this period?

Which price index measures the average price of things purchased by the typical family?

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

Which is likely to have the larger effect on the CPI, a 2 per cent increase in the price of food or a 3 per cent increase in the price of diamond rings? Explain.

If the nominal interest rate is 12 per cent and the rate of inflation is 7 per cent, then the real rate of interest is 5 per cent.

If you borrow money at a nominal interest rate of 5 per cent and the inflation rate is 10 per cent, what real interest rate will you pay?