Question 1

-The CPI basket contains 400 oranges and 800 pens. In the base year, the price of an orange is $1.00 and the price of a pen is $0.75. This year, urban consumers each buy 300 oranges at $2.00 each and 850 pens at $1.00 each. The CPI this year is

Accepted Answer

The CPI is calculated by comparing the cost of the basket in the current year to the cost in the base year. Base year cost = (400 oranges * $1) + (800 pens * $0.75) = $1000. Current year cost = (400 oranges * $2) + (800 pens * $1) = $1600. CPI = (Current year cost / Base year cost) * 100 = (1600 / 1000) * 100 = 160.

Question 2

Suppose the CPI last year is 121 and the CPI this year is 137. The CORRECT method to calculate the inflation rate is

Accepted Answer

The correct method to calculate the inflation rate is to subtract the old CPI from the new CPI, divide by the old CPI, and then multiply by 100 to get a percentage. This is exactly what option C does.

Question 3

If the basket of goods and services used to calculate the CPI cost $200 in the reference base period and $450 in a later year, the CPI for the latter year equals

Accepted Answer

The Consumer Price Index (CPI) for the latter year is calculated by dividing the cost of the basket in the latter year by the cost in the base year and then multiplying by 100. So, $ \frac{450}{200} \times 100 = 225 $.

Question 4

-The information in the table above gives the 2016 reference base period CPI basket and prices used to construct the CPI for a small nation. It also has the 2017 prices. What is the value of the CPI for the reference base period, 2016?

Accepted Answer

The Consumer Price Index (CPI) for the reference base period is always set to 100. This is a standard convention to facilitate comparison of price levels across different periods.

Question 5

The cost of inflation to society includes
I. the opportunity costs of resources used by people to protect themselves against inflation.
II. the diversion of productive resources to forecasting inflation.

Accepted Answer

Both I and II are correct. The cost of inflation includes the opportunity costs of resources used by individuals and businesses to protect themselves against inflation, such as investing in assets that are less affected by inflation rather than in more productive ventures. It also includes the diversion of resources towards activities like forecasting inflation to mitigate its effects, which could have been used in more productive ways.

Question 6

The first step in measuring the CPI is to

Accepted Answer

The first step in measuring the Consumer Price Index (CPI) is to select the market basket, which is a fixed list of goods and services representative of what a typical consumer might purchase.

Question 7

-The information in the table above gives the 2016 reference base period CPI basket and prices used to construct the CPI for a small nation. It also has the 2017 prices. What is the value of the CPI for 2017?

Accepted Answer

The CPI is calculated by dividing the cost of the basket of goods in the current year by the cost of the same basket of goods in the base year and multiplying by 100. In this case, the cost of the basket of goods in 2016 was 100, and the cost of the same basket of goods in 2017 was 140. Therefore, the CPI for 2017 is 140 / 100 * 100 = 140.

Question 8

-If 2009 is the reference base period, what is the price index for the CPI basket of goods for 2015 in the above table?

Accepted Answer

The price index for the CPI basket of goods for 2015 is 102.8, indicating that the overall price level has increased by 2.8% compared to the base year 2009.

Question 9

-If the CPI basket of goods cost $200 in the reference base period and $450 in a later year, the CPI in the later year equals

Accepted Answer

The CPI is calculated by dividing the cost of the basket in the later year by the cost in the base period and then multiplying by 100. So, ($450/$200) * 100 = 225.

Question 10

The Consumer Price Index is a measure of the average of the prices paid by ________ for a fixed basket of consumer goods and services.

Accepted Answer

The Consumer Price Index (CPI) is primarily a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Question 11

Suppose the Consumer Price Index is 143.6. What does that number mean?

Accepted Answer

The Consumer Price Index (CPI) measures changes in the price level of a weighted average market basket of consumer goods and services purchased by households. A CPI of 143.6 means that prices have increased by 43.6% over the reference base period (usually set to 100).

Question 12

Using the notation P_t to designate this period's price level and P_t-1 to designate last period's price level, the formula for measuring the inflation rate from last period to this period is

Accepted Answer

The correct formula for calculating the inflation rate is to subtract last period's price level from this period's price level, then divide by last period's price level, and finally multiply by 100 to convert it into a percentage. This is exactly what option C represents.

Question 13

Inflation is a problem when

Accepted Answer

Inflation becomes a problem when it is unpredictable, causes the value of money to vary unpredictably, and leads to resources being diverted from productive uses. All these factors contribute to economic instability and inefficiency.

Question 14

In a period of rapid, unexpected inflation, resources can be lost

Accepted Answer

Rapid, unexpected inflation can lead to resource loss when firms allocate resources to forecast inflation, as these resources could have been used more productively elsewhere. Rapid inflation does not almost always turn into hyperinflation, making C incorrect.

Question 15

If the CPI basket costs $35 in the base period but costs $42, what is the CPI in the next period?

Accepted Answer

The Consumer Price Index (CPI) is calculated by taking the cost of the basket in the current period ($42), dividing it by the cost of the basket in the base period ($35), and then multiplying by 100. Therefore, CPI = ($42 / $35) * 100 = 120.

Question 16

Unpredictable changes in the value of money, which brings about gains and losses, are a consequence of unpredictable changes in

Accepted Answer

Unpredictable changes in the value of money, leading to gains and losses, are primarily a consequence of unpredictable changes in inflation. Inflation affects the purchasing power of money, making its value less predictable over time.

Question 17

The consumer price index (CPI)

Accepted Answer

The consumer price index (CPI) compares the cost in the current period to the cost in a reference base period of a basket of goods typically consumed in the base period, to measure inflation or the cost of living changes over time.

Question 18

The cost of inflation to society includes

Accepted Answer

Inflation causes unpredictable changes in the value of money, which can lead to uncertainty and inefficiencies in the economy.

Question 19

Hyperinflation is defined as

Accepted Answer

Hyperinflation is characterized by very high and typically accelerating inflation rates, often resulting in the rapid erosion of the real value of the local currency.

Question 20

If the CPI is 120, this means that

Accepted Answer

The Consumer Price Index (CPI) measures changes in the price level of a market basket of consumer goods and services purchased by households. A CPI of 120 means that prices have increased by 20% compared to the reference base period (which is typically set at 100).

Quiz 5: Monitoring Jobs and Inflation