Q: Suppose the cost of the CPI basket in the base year is $$100, and in the current year it is 120. $$What is the CPI for the current year?

$$ \displaystyle CPI = 100 \times \frac{120}{100} = 120 $$

Q: If the CPI was 120 last year and 126 this year, what is the inflation rate for this year?

$$ \displaystyle \frac{126 - 120}{120} \times 100 = 5\% $$

Q: A household’s basket in 2023 consists of 10 lbs. beef at $$4/lb and 20 lbs. chicken at 4/lb. In 2024$$, beef is $$5/lb and chicken is 5/lb. $$What is the cost of the basket in 2024?

$$ \displaystyle (10 \times 5) + (20 \times 5) = 50 + 100 = 150 $$

Q: If the CPI basket cost $$120 in 2023 (base year) and 150 in 2024$$, what is the CPI in 2024?

$$ \displaystyle CPI = 100 \times \frac{150}{120} = 125 $$

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?

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

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 is $$100, and in the current year it is 120. $$What is the CPI for the current year?

Accepted Answer

$$ \displaystyle CPI = 100 	imes \frac{120}{100} = 120 $$

Question 3

If the CPI was 120 last year and 126 this year, what is the inflation rate for this year?

Accepted Answer

$$ \displaystyle \frac{126 - 120}{120} 	imes 100 = 5\% $$

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

It uses a fixed basket of goods and misses substitution toward cheaper goods, introduction of new goods, and unmeasured quality changes.

Question 6

A household’s basket in 2023 consists of 10 lbs. beef at $$4/lb and 20 lbs. chicken at 4/lb. In 2024$$, beef is $$5/lb and chicken is 5/lb. $$What is the cost of the basket in 2024?

Accepted Answer

$$ \displaystyle (10 	imes 5) + (20 	imes 5) = 50 + 100 = 150 $$

Question 7

If the CPI basket cost $$120 in 2023 (base year) and 150 in 2024$$, what is the CPI in 2024?

Accepted Answer

$$ \displaystyle CPI = 100 	imes \frac{150}{120} = 125 $$

Question 8

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

Accepted Answer

Starbucks raises the price of Frappuccinos sold in the U.S.

Question 9

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

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

Question 10

Which of the following is a problem with the CPI related to the introduction of new goods?

Accepted Answer

The CPI overstates the increase in the cost of living because it uses a fixed basket and misses the increased variety and value from new goods.

Question 11

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

Accepted Answer

$$ \displaystyle 8\% - 3\% = 5\% $$

Question 12

Which of the following best explains substitution bias in the CPI?

Accepted Answer

Consumers substitute toward goods that become relatively cheaper, but the CPI does not account for this because it uses a fixed basket.

Question 13

A college tuition was $$9,340 in 1990 (CPI = 130.7) and 43$$,350 in 2024 (CPI = 313.7). What is the 1990 tuition in 2024 dollars?

Accepted Answer

$$ \displaystyle 9,340 	imes \frac{313.7}{130.7} = 22,410 $$

Question 14

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

Accepted Answer

Capital goods produced domestically

Question 15

If the CPI basket cost $$120 in 2023, 150 in 2024$$, and $210 in 2025, what is the inflation rate from 2024 to 2025?

Accepted Answer

$$ \displaystyle \frac{210 - 150}{150} 	imes 100 = 40\% $$

Question 16

Which of the following would cause the CPI to overstate inflation due to unmeasured quality change?

Accepted Answer

A new smartphone model is released with better features but the CPI only tracks its price increase.

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 because the real interest rate is negative: $$6\% - 7\% = -1\%.$$

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 consumer goods, while the GDP deflator uses a basket of currently produced goods and services.

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

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