Q: Suppose the cost of the CPI basket in 2023 (base year) is $$120, in 2024 is 150$$, and in 2025 is $210. What is the CPI in 2024?

$$ CPI_{2024} = 100 \times \frac{150}{120} = 125 $$

Q: If the CPI in 2024 is 125 and the CPI in 2025 is 175, what is the inflation rate from 2024 to 2025?

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

Q: A household changes its consumption from 10 lbs. beef and 20 lbs. chicken in 2024 to 5 lbs. beef and 25 lbs. chicken in 2025. If beef is $$9/lb and chicken is 6/lb in 2025$$, what is the cost of the household's basket in 2025?

$$ 5 \times 9 + 25 \times 6 = 45 + 150 = 210 $$

Q: Which formula is used to convert an amount from year T into today's dollars using the CPI?

$$ \text{Amount in today's dollars} = \text{Amount in year T dollars} \times \frac{\text{Price level today}}{\text{Price level in year T}} $$

Q: A student wants to compare the purchasing power of the minimum wage in 1964 ($$1.15, CPI=31.0) to 2024 (7.25$$, CPI=313.7). What is the 1964 wage in 2024 dollars?

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

Question 1

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

Accepted Answer

A measure of the typical consumer's cost of living based on a fixed basket of goods and services.

Question 2

Suppose the cost of the CPI basket in 2023 (base year) is $$120, in 2024 is 150$$, and in 2025 is $210. What is the CPI in 2024?

Accepted Answer

$$ CPI_{2024} = 100 	imes \frac{150}{120} = 125 $$

Question 3

If the CPI in 2024 is 125 and the CPI in 2025 is 175, what is the inflation rate from 2024 to 2025?

Accepted Answer

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

Question 4

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 toward cheaper goods.

Question 5

A household changes its consumption from 10 lbs. beef and 20 lbs. chicken in 2024 to 5 lbs. beef and 25 lbs. chicken in 2025. If beef is $$9/lb and chicken is 6/lb in 2025$$, what is the cost of the household's basket in 2025?

Accepted Answer

$$ 5 	imes 9 + 25 	imes 6 = 45 + 150 = 210 $$

Question 6

Which of the following is NOT included in the CPI basket?

Accepted Answer

Capital goods produced domestically

Question 7

If the price of Italian jeans sold in the U.S. increases, which inflation measure(s) will be affected?

Accepted Answer

Only the CPI

Question 8

How does the introduction of new goods affect the CPI?

Accepted Answer

It makes each dollar more valuable, but the CPI misses this effect and overstates the cost of living.

Question 9

Which formula is used to convert an amount from year T into today's dollars using the CPI?

Accepted Answer

$$ 	ext{Amount in today's dollars} = 	ext{Amount in year T dollars} 	imes \frac{	ext{Price level today}}{	ext{Price level in year T}} $$

Question 10

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 11

Which of the following is true about the GDP deflator compared to the CPI?

Accepted Answer

The GDP deflator uses a basket of currently produced goods and services.

Question 12

A student wants to compare the purchasing power of the minimum wage in 1964 ($$1.15, CPI=31.0) to 2024 (7.25$$, CPI=313.7). What is the 1964 wage in 2024 dollars?

Accepted Answer

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

Question 13

Which scenario would affect the CPI but not the GDP deflator?

Accepted Answer

An Italian brand raises the price of jeans sold in the U.S.

Question 14

If the CPI basket consists of 10 lbs. beef and 20 lbs. chicken, and in 2023 beef is $$4/lb and chicken is 4/lb$$, what is the cost of the basket in 2023?

Accepted Answer

$$ 10 	imes 4 + 20 	imes 4 = 40 + 80 = 120 $$

Question 15

Which of the following is an example of unmeasured quality change affecting the CPI?

Accepted Answer

A new smartphone model is released with better features but at the same price.

Question 16

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

Accepted Answer

$$ \frac{11,610 - (1,910 	imes \frac{313.7}{130.7})}{(1,910 	imes \frac{313.7}{130.7})} 	imes 100\% $$

Question 17

Which of the following would cause the CPI to overstate the true increase in the cost of living?

Accepted Answer

Consumers substitute toward goods that become relatively cheaper.

Question 18

If the nominal interest rate is 6% and inflation is 7%, what happens to the purchasing power of money deposited in a bank?

Accepted Answer

It decreases by 1%.

Question 19

Which of the following is true regarding the CPI and GDP deflator?

Accepted Answer

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

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

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