Q: What is the formula for calculating the Consumer Price Index (CPI) in a given year?

$$\frac{\text{cost of basket in current year}}{\text{cost of basket in base year}} \times 100$$

Q: If the cost of the CPI basket in 2023 (base year) is $$120, and in 2024 it is 150$$, what is the CPI for 2024?

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

Q: Suppose the CPI in 2024 is 125 and in 2025 it is 175. What is the inflation rate from 2024 to 2025?

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

Q: If the minimum wage was $1.15 in 1964 (CPI = 31.0) and the CPI in 2024 is 313.7, what is the 1964 minimum wage in 2024 dollars?

$$1.15 \times \frac{313.7}{31.0} = 11.64$

Q: If the cost of the CPI basket in 2025 is $$210 and in 2024 it was 150$$, what is the percentage increase in the cost of the basket?

$$\frac{210 - 150}{150} \times 100\% = 40\%$$

Question 1

Which category represents the largest share in the Consumer Price Index (CPI) basket, as shown in the pie chart from the study materials?

Accepted Answer

Housing

Question 2

What is the formula for calculating the Consumer Price Index (CPI) in a given year?

Accepted Answer

$$\frac{	ext{cost of basket in current year}}{	ext{cost of basket in base year}} 	imes 100$$

Question 3

If the cost of the CPI basket in 2023 (base year) is $$120, and in 2024 it is 150$$, what is the CPI for 2024?

Accepted Answer

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

Question 4

Suppose the CPI in 2024 is 125 and in 2025 it is 175. What is the inflation rate from 2024 to 2025?

Accepted Answer

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

Question 5

Which of the following is a problem with the CPI that can cause it to overstate the true increase in the cost of living?

Accepted Answer

It uses a fixed basket and misses substitution bias.

Question 6

A household changes its consumption from 10 lbs. of beef and 20 lbs. of chicken to 5 lbs. of beef and 25 lbs. of chicken in response to price changes. What CPI problem does this illustrate?

Accepted Answer

Substitution bias

Question 7

If the price of imported Italian jeans rises, how does this affect the CPI and the GDP deflator?

Accepted Answer

It increases the CPI but not the GDP deflator.

Question 8

Which of the following is included in the GDP deflator but excluded from the CPI?

Accepted Answer

Capital goods produced domestically

Question 9

Given the following: Nominal interest rate = 8%, Inflation rate = 3%. What is the real interest rate?

Accepted Answer

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

Question 10

If the minimum wage was $1.15 in 1964 (CPI = 31.0) and the CPI in 2024 is 313.7, what is the 1964 minimum wage in 2024 dollars?

Accepted Answer

$$1.15 	imes \frac{313.7}{31.0} = 11.64$

Question 11

Which of the following best explains why the CPI may not fully capture improvements in the quality of goods?

Accepted Answer

Quality changes are difficult to measure and may be missed.

Question 12

A student deposits $1,000 in a bank account for one year. The nominal interest rate is 6%, and inflation is 2%. What is the purchasing power of the deposit after one year?

Accepted Answer

It has grown by 4%.

Question 13

Which of the following is NOT a reason why the CPI may overstate the true increase in the cost of living?

Accepted Answer

It excludes government spending from the basket

Question 14

If the cost of the CPI basket in 2025 is $$210 and in 2024 it was 150$$, what is the percentage increase in the cost of the basket?

Accepted Answer

$$\frac{210 - 150}{150} 	imes 100\% = 40\%$$

Question 15

Which of the following would cause the GDP deflator to increase but not the CPI?

Accepted Answer

A rise in the price of domestically produced industrial equipment

Question 16

If tuition at a public 4-year university was $$1,910 in 1990 (CPI = 130.7) and 11$$,610 in 2024 (CPI = 313.7), what is the 1990 tuition in 2024 dollars?

Accepted Answer

$$1,910 	imes \frac{313.7}{130.7} = 4$$,583$

Question 17

Which of the following best describes the difference between the CPI and the GDP deflator?

Accepted Answer

The CPI uses a fixed basket of goods, while the GDP deflator uses a basket of currently produced goods and services.

Measuring the Cost of Living: CPI, Inflation, and Real vs. Nominal Values

Study Guide - Practice Questions

Study Guide - Flashcards