Q: Suppose the cost of a fixed basket of goods was $$120 in the base year and 150 in $$the current year. What is the CPI for the current year?

$$CPI = 100 \times \frac{150}{120} = 125$$

Q: If the CPI was 125 in 2022 and 175 in 2023, what was the inflation rate from 2022 to 2023?

$$\text{Inflation Rate} = \frac{175 - 125}{125} \times 100 = 40\%$$

Q: If the CPI in 1980 was 200 and the CPI today is 300, how much money today has the same purchasing power as $600 in 1980?

$$600 \times \frac{300}{200} = 900$$

Q: If the price of gasoline was 9.5 cents per litre in 1957 and the CPI was 14.8 in 1957 and 139.3 in 2021, what is the price of gasoline in 2021 dollars?

$$9.5 \times \frac{139.3}{14.8} = 89.5$$ cents

Question 1

Which of the following best describes the Consumer Price Index (CPI)?

Accepted Answer

A measure of the overall cost of the goods and services bought by a typical consumer.

Question 2

Suppose the cost of a fixed basket of goods was $$120 in the base year and 150 in $$the current year. What is the CPI for the current year?

Accepted Answer

$$CPI = 100 	imes \frac{150}{120} = 125$$

Question 3

If the CPI was 125 in 2022 and 175 in 2023, what was the inflation rate from 2022 to 2023?

Accepted Answer

$$	ext{Inflation Rate} = \frac{175 - 125}{125} 	imes 100 = 40\%$$

Question 4

Which of the following is NOT a problem with the CPI as a measure of the cost of living?

Accepted Answer

It does not include the prices of domestically produced capital goods.

Question 5

The GDP deflator differs from the CPI in that:

Accepted Answer

The GDP deflator reflects prices of all goods and services produced domestically, while the CPI reflects prices of goods and services bought by consumers.

Question 6

If the CPI in 1980 was 200 and the CPI today is 300, how much money today has the same purchasing power as $600 in 1980?

Accepted Answer

$$600 	imes \frac{300}{200} = 900$$

Question 7

Which of the following best explains why the CPI tends to overstate the true cost of living?

Accepted Answer

It does not fully account for consumers substituting cheaper goods when prices change.

Question 8

Suppose you deposit $$2,000 in a savings account, and a year later you have 2$$,100. If the CPI rises from 200 to 204 during that year, what is the nominal interest rate and the real interest rate?

Accepted Answer

Nominal interest rate: 5%; Real interest rate: 1%

Question 9

Which of the following is an example of indexation?

Accepted Answer

A labor contract that automatically increases wages when the CPI rises.

Question 10

If the price of gasoline was 9.5 cents per litre in 1957 and the CPI was 14.8 in 1957 and 139.3 in 2021, what is the price of gasoline in 2021 dollars?

Accepted Answer

$$9.5 	imes \frac{139.3}{14.8} = 89.5$$ cents

Question 11

Which of the following would cause the CPI and the GDP deflator to diverge the most?

Accepted Answer

A sharp increase in the price of imported oil.

Question 12

If the nominal interest rate is 8% and the inflation rate is 3%, what is the real interest rate?

Accepted Answer

$$8\% - 3\% = 5\%$$

Question 13

Which of the following is included in the CPI but not in the GDP deflator?

Accepted Answer

Imported consumer goods.

Question 14

If the CPI increases from 150 to 165 in one year, what is the inflation rate for that year?

Accepted Answer

$$\frac{165 - 150}{150} 	imes 100 = 10\%$$

Question 15

Which of the following best describes 'core' inflation?

Accepted Answer

A measure of the underlying trend in inflation, excluding volatile items such as food and energy.

Question 16

A student creates a Student Price Index (SPI) by tracking the prices of five goods they regularly purchase. If the total cost of the basket rises from $$200 to 220 in $$one year, what is the SPI inflation rate?

Accepted Answer

$$\frac{220 - 200}{200} 	imes 100 = 10\%$$

Measuring the Cost of Living: Consumer Price Index and Inflation

Study Guide - Practice Questions

Study Guide - Flashcards