Q: Suppose the cost of the CPI basket in the base year (2023) is $$80, and in 2024 it is 100. $$What is the CPI in 2024?

$$CPI_{2024} = 100 \times \frac{100}{80} = 125$$

Q: If the CPI in 2024 is 125 and the CPI in 2025 is 140, what is the inflation rate from 2024 to 2025?

$$\text{Inflation Rate} = \frac{140 - 125}{125} \times 100 = 12\%$$

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

$$\text{Real Interest Rate} = 8\% - 3\% = 5\%$$

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

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

Q: If the CPI in 1964 was 31.0 and in 2024 is 313.7, what is the value in 2024 dollars of a $1.15 minimum wage in 1964?

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

Question 1

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

Accepted Answer

To measure the typical consumer’s cost of living by tracking the prices of a fixed basket of goods and services.

Question 2

Suppose the cost of the CPI basket in the base year (2023) is $$80, and in 2024 it is 100. $$What is the CPI in 2024?

Accepted Answer

$$CPI_{2024} = 100 	imes \frac{100}{80} = 125$$

Question 3

If the CPI in 2024 is 125 and the CPI in 2025 is 140, what is the inflation rate from 2024 to 2025?

Accepted Answer

$$	ext{Inflation Rate} = \frac{140 - 125}{125} 	imes 100 = 12\%$$

Question 4

Which of the following is NOT a major category in the CPI basket?

Accepted Answer

Stock Market Investments

Question 5

Why does the CPI tend to overstate the true increase in the cost of living?

Accepted Answer

Because it uses a fixed basket and misses substitution toward relatively cheaper goods.

Question 6

A household changes its consumption from 10 lbs. beef and 20 lbs. chicken in 2023 to 5 lbs. beef and 25 lbs. chicken in 2025 because chicken became relatively cheaper. What CPI problem does this illustrate?

Accepted Answer

Substitution bias

Question 7

Which of the following scenarios would affect the CPI but NOT the GDP deflator?

Accepted Answer

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

Question 8

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

Accepted Answer

$$	ext{Real Interest Rate} = 8\% - 3\% = 5\%$$

Question 9

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

Accepted Answer

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

Question 10

If the CPI in 1964 was 31.0 and in 2024 is 313.7, what is the value in 2024 dollars of a $1.15 minimum wage in 1964?

Accepted Answer

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

Question 11

Which of the following is a limitation of the CPI when new goods are introduced?

Accepted Answer

The CPI overstates the cost of living because it does not account for increased variety and consumer choice.

Question 12

Which of the following best explains why the CPI may not fully account for improvements in product quality?

Accepted Answer

The BLS tries to account for quality changes, but some improvements are difficult to measure and may be missed.

Question 13

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

Accepted Answer

Capital goods produced domestically

Question 14

A student wants to compare the real increase in tuition costs between 1990 and 2024. Which step is necessary before calculating the percentage increase?

Accepted Answer

Express the 1990 tuition figures in 2024 dollars using the CPI.

Question 15

If the CPI basket cost $$80 in 2023, 100 in 2024$$, and $140 in 2025, what is the percentage increase in the cost of the basket from 2024 to 2025?

Accepted Answer

$$\frac{140 - 100}{100} 	imes 100 = 40\%$$

Question 16

Which of the following would cause the CPI to overstate inflation compared to the true cost of living?

Accepted Answer

Consumers substitute toward goods that become relatively cheaper, but the CPI basket remains fixed.

Question 17

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

Accepted Answer

It decreases by 1%.

Question 18

Which of the following is a key 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.

Question 19

If Starbucks raises the price of Frappuccinos, which price index(s) will be affected?

Accepted Answer

Both the CPI and the GDP deflator

Measuring the Cost of Living: The Consumer Price Index (CPI) and Inflation

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