Question 1

Suppose the price of hot dogs increases while the price of hamburgers remains constant. According to the Consumer Price Index (CPI) calculation method, what is a likely consequence?

Accepted Answer

The CPI will overstate the increase in the cost of living because it uses a fixed basket and does not account for substitution.

Question 2

Which of the following best describes 'core inflation' as used by policymakers?

Accepted Answer

It measures the underlying trend in inflation by excluding the most volatile components of the CPI basket.

Question 3

If the CPI in 2020 is 120 and in 2021 is 126, what is the inflation rate between 2020 and 2021? Use the formula $$ inflation\ rate = \frac{CPI_{2021} - CPI_{2020}}{CPI_{2020}} 	imes 100\% .$$

Accepted Answer

$$ 5\% $$

Question 4

Which of the following is NOT a problem associated with the CPI as a measure of the cost of living?

Accepted Answer

It includes prices of goods produced abroad

Question 5

A new smartphone is introduced with features that significantly improve its quality compared to last year's model, but its price remains the same. How does this affect the CPI?

Accepted Answer

The CPI may overstate the cost of living because it does not fully account for the quality improvement.

Question 6

Which of the following statements correctly distinguishes the GDP deflator from the CPI?

Accepted Answer

The CPI uses a fixed basket of goods and services, while the GDP deflator uses a changing basket based on current production.

Question 7

Suppose the cost of the CPI basket in the base year is $$1000, and in the current year it is 1$$,150. What is the CPI for the current year? Use the formula $$ CPI = \frac{	ext{Cost of basket in current year}}{	ext{Cost of basket in base year}} 	imes 100 .$$

Accepted Answer

$$ 115 $$

Question 8

Why might the introduction of new goods cause the CPI to overstate the cost of living?

Accepted Answer

The CPI basket is not updated frequently enough to include new goods, so it misses the increase in purchasing power.

Question 9

If the CPI overstates the cost of living by 0.5 percentage points per year, what is a potential consequence for government transfer payments tied to the CPI?

Accepted Answer

Transfer payments will be higher than intended.

Question 10

Which of the following best explains why the CPI and the GDP deflator may diverge in their measurement of inflation?

Accepted Answer

The CPI uses a fixed basket of goods, while the GDP deflator uses a basket that changes with current production.

Question 11

A Canadian consumer's budget is most heavily weighted toward which category in the CPI basket?

Accepted Answer

Shelter

Question 12

Suppose the price of a fixed basket of goods was $$200 in the base year and 250 in $$the current year. What is the CPI in the current year? Use $$ CPI = \frac{	ext{Cost of basket in current year}}{	ext{Cost of basket in base year}} 	imes 100 .$$

Accepted Answer

$$ 125 $$

Question 13

If the CPI in 2022 is 140 and in 2023 is 154, what is the inflation rate from 2022 to 2023? Use $$ inflation\ rate = \frac{CPI_{2023} - CPI_{2022}}{CPI_{2022}} 	imes 100\% .$$

Accepted Answer

$$ 12\% $$

Question 14

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

Accepted Answer

A laptop's price remains the same, but its processing speed doubles.

Question 15

Which of the following would cause the CPI to increase, even if the cost of living has not actually risen as much as the CPI suggests?

Accepted Answer

Consumers substitute cheaper goods for more expensive ones, but the CPI basket does not change.

Question 16

If the price of imported electronics rises sharply, which price index will be most affected?

Accepted Answer

The CPI, because it includes goods bought by consumers, including imports.

Question 17

A country experiences a technological breakthrough that improves the quality of all goods, but prices remain unchanged. What is the likely effect on the CPI?

Accepted Answer

The CPI will remain unchanged, overstating the true cost of living.

Question 18

Which of the following best describes the inflation rate?

Accepted Answer

The percentage change in the price level from the previous period.

Question 19

If the CPI basket is not updated frequently, what is a likely result?

Accepted Answer

The CPI will overstate the cost of living due to substitution bias and introduction of new goods.

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

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