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Exam 4: Measuring the Cost of Living

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Question 1

True/False

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Because an increase in petrol prices causes consumers to ride their bikes more and drive their cars less, the Consumer Prices Index (CPI) tends to underestimate the cost of living.

A) True
B) False

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Question 2

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Improvements in the quality of consumer goods and services over time

A) cause the CPI to overstate actual inflation.
B) cause the CPI to understate actual inflation.
C) are accounted for in the CPI.
D) are insignificant and thus would not affect the CPI even if accounted for.

E) A) and D)
F) C) and D)

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Question 3

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If lenders demand a real rate of return of 4 per cent and they expect inflation to be 5 per cent, then they should charge 9 per cent interest when they extend loans.

The GDP deflator differs from the CPI because the GDP deflator includes goods a country __________, while the CPI includes goods the country __________.

Under which of the following conditions would you prefer to be the borrower?

Suppose you spend 30 per cent of your budget on food, 20 per cent on transport, 40 per cent on rent, 5 per cent on entertainment, and 5 per cent on miscellaneous items.If the price of all parts of your budget rises equally in percentage terms, which would have the most weight on your cost of living increase? (Assume you calculate your index the same way the CPI is calculated.)

An increase in the price of helicopters purchased by the SA National Defence Force is captured by the Consumer Prices Index (CPI).

If the CPI has a value of 150 today and the base year is 2000, then it costs

If workers and firms agree on an increase in wages based on their expectations of inflation and inflation turns out to be more than they expected,

The CPI is used to

In 2012, the CPI was 124.0 in a country. In 2013, it was 130.7.What was the rate of inflation over this period?

Why does the GDP deflator give a different rate of inflation than the CPI?

When borrowing money to purchase a car, Thabo has the choice between a fixed nominal interest rate and adjustable nominal interest rate loan.Typically the adjustable rate loans start with a lower rate than the fixed rate loan.Given that, Thabo would probably want to borrow money at the higher fixed rate when he expects the

If the price of the market basket of goods in a country for the base year of 2013 was R20,000 and the price of the same basket had risen to R22,000 by 2014, the CPI for 2014

The table shows the prices and the quantities consumed in Carnivore Country.The base year is 2013.This means that 2013 is the year the typical basket was determined so the quantities consumed in 2013 are the only quantities needed to calculate the CPI in each year. Table $\begin{array} { | c | c | c | c | c | } \hline \text { Year } & \begin{array} { c } \text { Price of } \\\text { beef }\end{array} & \begin{array} { c } \text { Quartity of } \\\text { beef }\end{array} & \begin{array} { c } \text { Price of } \\\text { pork }\end{array} & \begin{array} { c } \text { Quartity of } \\\text { pork }\end{array} \\\hline 2013 & \text { R38 } & 100 & \text { R19 } & 100 \\\hline 2014 & \text { R47.50 } & 90 & \text { R.7.10 } & 120 \\\hline 2015 & \text { R52.25 } & 105 & \text { R19 } & 130 \\\hline\end{array}$ -Refer to the table above.What are the values of the CPI in 2013, 2014, and 2015, respectively?

Which of the following statements is correct?

If a lender wants a real return of 6 per cent and she expects inflation to be 4 per cent, which of the following is the nominal interest rate to charge?

Which of the following is a reason why the CPI is not calculated as a simple average of all prices?

If the CPI has a value of 115 today and the base year is 2014, then consumer prices have

An increase in the price of imported cameras is captured by the Consumer Prices Index (CPI) but not by the GDP deflator.