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Exam 24: Measuring the Cost of Living

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Question 21

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When the quality of a good improves while its price remains the same, the purchasing power of the dollar

A) increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
B) increases, so the CPI understates the change in the cost of living if the quality change is not accounted for.
C) decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
D) decreases, so the CPI understates the change in the cost of living if the quality change is not accounted for.

E) None of the above
F) A) and D)

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Question 22

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Write the formula for computing the cost of a basket of goods in a given period assuming you only have two goods, X and Y, which are bought in quantities Qx and Qy, and sold at prices of Px and Py.

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Question 23

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What is the difference between the Consumer Price Index and the Producer Price Index?

Data from the Bureau of Labor Statistics show that consumer spending on medical care is about equal to consumer spending on housing.

Data from the Bureau of Labor Statistics show that apparel makes up 14 percent of the typical consumer's budget.

Suppose that the CPI in 2009 is 220 and that the inflation rate is 5% in 2010. What is the CPI in 2010?

Abhijit deposits $100 in a bank account that pays an annual interest rate of 5 percent. A year later, Abhijit withdraws his $105. If deflation was 7 percent during the year the money was deposited, then Abhijit's purchasing power has increased by 12 percent.

Core CPI is

The table below lists the prices of chips and salsa for the months of October, November, and December. Assume that the typical consumer buys 8 bags of chips and 4 jars of salsa each month, and that October is the base period. $\begin{array} { | l | l | l | } \hline \text { Month } & \text { Price of Chips } & \text { Price of Salsa } \\\hline \text { October } & \$ 2.50 & \$ 2.50 \\\hline \text { November } & \$ 2.40 & \$ 2.55 \\\hline \text { December } & \$ 2.60 & \$ 2.75 \\\hline\end{array}$ -Refer to Table 24-6. Calculate the cost of a basket of goods for each month.

The producer price index measures the cost of a basket of goods and services

Which of the following statements is correct about the relationship between inflation and interest rates?

Suppose the price of a quart of milk rises from $1.00 to $1.20 and the price of a T-shirt rises from $8.00 to $9.60. If the CPI rises from 150 to 195, then people likely will buy

The introduction of the video cassette recorder in the 1970s exemplified a problem in measuring the cost of living; that problem is the problem of

​The PPI is a price index that measures the cost to consumers of a typical basket of goods sold by firms.

When consumer spending is broken down into the major categories of goods and services, the largest single category is spending on transportation.

The consumer price index is used to

The table below lists the prices of chips and salsa for the months of October, November, and December. Assume that the typical consumer buys 8 bags of chips and 4 jars of salsa each month, and that October is the base period. $\begin{array} { | l | l | l | } \hline \text { Month } & \text { Price of Chips } & \text { Price of Salsa } \\\hline \text { October } & \$ 2.50 & \$ 2.50 \\\hline \text { November } & \$ 2.40 & \$ 2.55 \\\hline \text { December } & \$ 2.60 & \$ 2.75 \\\hline\end{array}$ -Refer to Table 24-6. Calculate the inflation rate for March.

If the real interest rate is 5 percent and the inflation rate is 2 percent, then the nominal interest rate is 7 percent.

The CPI is a measure of the overall cost of the goods and services bought by a typical consumer.

Many economists believe the bias in the CPI is now only about half as large as it once was.