Q: Suppose the price of a basket of goods was $100 in 1914 and the CPI in 2022 is 1649. If the CPI in 1914 was 10, what would be the equivalent cost of the basket in 2022 dollars?

$$100 \times \frac{1649}{10} = 16$$,490$

Q: If the CPI was 200 in 1980 and is 300 today, what amount of money in 1980 would have the same purchasing power as $900 today?

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

Q: Which formula correctly converts an amount from year T dollars to today’s dollars using the CPI?

$$\text{Amount in today’s dollars} = \text{Amount in year T dollars} \times \frac{\text{CPI today}}{\text{CPI in year T}}$$

Question 1

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

Accepted Answer

The change in the overall price level of goods and services purchased by households.

Question 2

Suppose the price of a basket of goods was $100 in 1914 and the CPI in 2022 is 1649. If the CPI in 1914 was 10, what would be the equivalent cost of the basket in 2022 dollars?

Accepted Answer

$$100 	imes \frac{1649}{10} = 16$$,490$

Question 3

If the nominal interest rate on a savings account is 6% and the inflation rate is 4%, what is the real interest rate?

Accepted Answer

$$6\% - 4\% = 2\%$$

Question 4

Which of the following is a limitation of the CPI as a measure of the cost of living?

Accepted Answer

It does not account for the substitution of cheaper goods by consumers.

Question 5

A worker’s wage contract includes a cost-of-living allowance (COLA) that is indexed to the CPI. If the CPI increases by 3% over the year, what happens to the worker’s wage?

Accepted Answer

The wage increases by 3%.

Question 6

If the CPI was 200 in 1980 and is 300 today, what amount of money in 1980 would have the same purchasing power as $900 today?

Accepted Answer

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

Question 7

Which of the following statements about the GDP deflator and the CPI is correct?

Accepted Answer

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

Question 8

Suppose you deposit $1,000 in a bank account that pays a nominal interest rate of 8% per year. If the inflation rate is 10%, what happens to your purchasing power after one year?

Accepted Answer

Your purchasing power decreases by 2%.

Question 9

Which formula correctly converts an amount from year T dollars to today’s dollars using the CPI?

Accepted Answer

$$	ext{Amount in today’s dollars} = 	ext{Amount in year T dollars} 	imes \frac{	ext{CPI today}}{	ext{CPI in year T}}$$

Question 10

If the nominal interest rate is 5% and the inflation rate is 7%, what is the real interest rate?

Accepted Answer

$$5\% - 7\% = -2\%$$

Question 11

Which of the following is an example of indexation?

Accepted Answer

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

Question 12

If the CPI overstates inflation, what is a likely reason for this bias?

Accepted Answer

The CPI does not account for consumers substituting cheaper goods for more expensive ones.

Question 13

A government transfer program uses indexation to adjust benefits. If inflation is higher than expected, what is the effect on the real value of benefits?

Accepted Answer

The real value of benefits remains constant.

Question 14

Suppose the CPI was 150 in 2010 and 180 in 2020. If a worker earned $45,000 in 2010, what salary in 2020 would have the same purchasing power?

Accepted Answer

$$45,000 	imes \frac{180}{150} = 54$$,000$

Question 15

Which of the following best explains why the real interest rate is important for savers?

Accepted Answer

It reflects the increase in purchasing power of savings after accounting for inflation.

Question 16

If the CPI rises from 250 to 260 over a year, what is the annual inflation rate?

Accepted Answer

$$\frac{260 - 250}{250} 	imes 100\% = 4\%$$

Question 17

Which of the following would NOT be included in the CPI basket?

Accepted Answer

A machine purchased by a Canadian factory for production.

Question 18

If the nominal interest rate is 4% and the inflation rate is 0%, what is the real interest rate?

Accepted Answer

$$4\% - 0\% = 4\%$$

Question 19

Which of the following best describes the purpose of measuring the overall level of prices in the economy?

Accepted Answer

To compare dollar figures from different points in time.

Measuring the Cost of Living: CPI, Inflation Correction, and Interest Rates

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