Question

ASSIGNMENT #5 9. One way the consumer price index (CPI) differs from the GDP chain price index is that the CPI: uses current year quantities of goods and services b. a. includes separate market baskets of goods and services for both base and current years. includes only goods and services bought by typical urban consumers. d. C. is bias free. 10. Suppose a market basket of goods and services costs $1,000 in the base year and the consumer price index (CPI) is currently 110. This indicates the price of the market basket of goods and services is now: $110. b. $1,000. c. $1,100. d. $1,225 a. Exhibit 7-1 Consumer Price Index Consumer Year Price Index 100 110 115 120 125 2 3 4 5 11. As shown in Exhibit 7-1, the rate of inflation for Year 2 is: a. 5 percent. b. 10 регcent. c. 20 percent. d. 25 percent. As shown in Exhibit 7-1, the rate of inflation for Year 5 is: a. 4.2 percent b. 5 percent. 12. c. 20 percent. d. 25 percent. As inflation drives up prices, people attempt to find substitutes and adjust what they buy. The resulting substitution bias problem causes the CPI to: a. overstate the impact of higher prices on consumers. b. consistently underestimate the true inflation rate. c. omit the benefits of product quality improvements. d. have larger fluctuations than other price indexes. 13. 14. Deflation refers to a: a. decreasing relative prices. b. decreasing price level. c. slowing down of the rate of inflation. d. federal government policy of running budget surpluses. 15. What does the Consumer Price Index (CPI) measure? a. prices of durable goods b. prices of non durable goods c. the cost of living over time d. the cost of replacing lost items 16. Suppose your nominal income this year is 5 percent higher than last year. If the inflation rate for the period was 3 percent, then your real income was: increased by 1.67 percent. b. increased by 2 percent. increased by 8 percent. d. decreased by 0.6 percent. a. C.

Answer 1

9.

C

CPI does not consider the whole economy, rather it is a basket of selective goods and services.

10.

C

Value of market basket = 110*1000/100 = $1100

11.

B

Inflation rate = (110-100)/110 = 10%

12.

A

Inflation rate in year 5 = (125-120)/120 = 4.2%

13.

A

14.

B

It is the negative inflation rate.

15.

C

16.

B

Real income growth = 5% - 3% = 2%