Question 1

It is impossible for real interest rates to be negative.

Accepted Answer

Real interest rates can be negative when the nominal interest rate is lower than the inflation rate. This means that the purchasing power of the money invested decreases over time. For example, if the nominal interest rate is 2% and the inflation rate is 3%, the real interest rate would be -1%.

Question 2

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

Accepted Answer

The Consumer Prices Index (CPI) measures changes in the prices of goods and services bought by households, not the prices of specific items purchased by government entities like the SA National Defence Force.

Question 3

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

Accepted Answer

The CPI measures changes in the prices of goods and services purchased by households, including imported cameras, while the GDP deflator measures changes in the overall price level of goods and services produced domestically. Therefore, an increase in the price of imported cameras would be captured by the CPI but not necessarily by the GDP deflator.

Question 4

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.

Accepted Answer

The answer of Because an increase in petrol prices causes...

Question 5

The first step in computing the CPI is to determine which prices are most important to the

Accepted Answer

The typical consumer is the most important to determine which prices to include in the CPI, as it is a measure of the average change in prices that they face for goods and services over time.

Question 6

Which price index measures the average price of things purchased by the typical family?

Accepted Answer

The Consumer Price Index (CPI) is used to measure the average price of things purchased by the typical family. The CPI calculates the changes in prices of a basket of goods and services that are typically consumed by urban households. It is a commonly used measure of inflation in the economy. The other options are not measures of the average price of things purchased by typical families.

Question 7

The good that receives the most weight in the CPI is the good that

Accepted Answer

The good that receives the most weight in the CPI is the good that consumers spend the largest fraction of their income on. This is because it reflects the most significant impact on their cost of living.

Question 8

Which item would receive the least weight in the CPI?

Accepted Answer

Brooms are a relatively low-cost item compared to cars, televisions, and car tyres, and their contribution to the overall spending of households is likely to be much smaller. Therefore, they would receive the least weight in the CPI calculation.

Question 9

The CPI is used to

Accepted Answer

The CPI (Consumer Price Index) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. It is used to monitor changes in the cost of living over time, making choice B the correct answer. A is incorrect because the GDP deflator is used to convert nominal GDP into real GDP. C is incorrect because the CPI does not characterize the types of goods and services that consumers purchase, but rather focuses on the change in their prices. D is incorrect because measuring the quantity of goods and services produced is the role of GDP, not CPI.

Question 10

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

Accepted Answer

Goods differ in their importance in the average consumer's budget, so a simple average would not accurately reflect the impact on overall inflation. The CPI uses a "weighted average" approach that assigns greater importance to goods that are more significant in the typical consumer's expenses.

Question 11

If the Consumer Prices Index (CPI) rises at 5 per cent per year, then every individual in the country needs exactly a 5 per cent increase in their income for their standard of living to remain constant.

Accepted Answer

The statement assumes that everyone's expenses have the same weight in the CPI, which is not the case as different individuals have different consumption baskets. Therefore, a 5 per cent increase in income may not be sufficient for everyone to maintain their standard of living. Additionally, even if expenses were identical, individuals may have other factors influencing their purchasing power, such as debt or savings.

Question 12

If your wage rises from R5000 per week to R6250 per week while the Consumer Prices Index (CPI) rises from 112 to 121, you should feel an increase in your standard of living.

Accepted Answer

The increase in wage is higher than the increase in CPI, which means the individual's purchasing power has increased, allowing for a higher standard of living.

Question 13

The CPI is used to

Accepted Answer

The CPI, or consumer price index, is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. It is used to monitor changes in the cost of living over time, as it reflects the inflation rate and how purchasing power is affected. It is not used to monitor wholesale prices, real GDP, or the stock market.

Question 14

An increase in the price of diamonds will have a greater impact on the Consumer Prices Index (CPI) than an equal percentage increase in the price of food because diamonds are so much more expensive.

Accepted Answer

The answer of An increase in the price of diamonds...

Question 15

Which item would receive the most weight in the consumer price index?

Accepted Answer

Food is a basic necessity and a major expense for most households, so it would receive the most weight in the consumer price index.

Question 16

If the nominal interest rate is 12 per cent and the rate of inflation is 7 per cent, then the real rate of interest is 5 per cent.

Accepted Answer

Real Interest Rate = Nominal Interest Rate - Inflation Rate

= 12% - 7%

= 5%

Question 17

Inflation can be measured by all of the following except the

Accepted Answer

While all of the other options listed are common measures of inflation, the "Finished goods price index" is not a widely recognized measure of inflation.

Question 18

The "base year" in a price index is the benchmark year against which other years are compared.

Accepted Answer

The statement is true. The base year serves as a reference point for measuring changes in prices over time. It is assigned an index number of 100, and all other years will have index numbers relative to the base year.

Question 19

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.

Accepted Answer

Lenders need to charge an interest rate that covers both the expected inflation rate and the desired real rate of return. In this case, the sum of the expected inflation rate and the desired real rate of return is 9 per cent (4% + 5%), so the lenders should charge that rate in order to maintain their real returns.

Question 20

The second step in computing the CPI is to find the prices of each of the goods and services in the ________ for each point in time.

Accepted Answer

The CPI is calculated based on a fixed basket of goods and services. Therefore, the prices of each item in the basket need to be collected at each point in time in order to calculate the change in the overall price level.

Quiz 4: Measuring the Cost of Living

It is impossible for real interest rates to be negative.

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

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

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.

The first step in computing the CPI is to determine which prices are most important to the

Which price index measures the average price of things purchased by the typical family?

The good that receives the most weight in the CPI is the good that

Which item would receive the least weight in the CPI?

The CPI is used to

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

If the Consumer Prices Index (CPI) rises at 5 per cent per year, then every individual in the country needs exactly a 5 per cent increase in their income for their standard of living to remain constant.

If your wage rises from R5000 per week to R6250 per week while the Consumer Prices Index (CPI) rises from 112 to 121, you should feel an increase in your standard of living.

The CPI is used to

An increase in the price of diamonds will have a greater impact on the Consumer Prices Index (CPI) than an equal percentage increase in the price of food because diamonds are so much more expensive.

Which item would receive the most weight in the consumer price index?

If the nominal interest rate is 12 per cent and the rate of inflation is 7 per cent, then the real rate of interest is 5 per cent.

Inflation can be measured by all of the following except the

The "base year" in a price index is the benchmark year against which other years are compared.

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 second step in computing the CPI is to find the prices of each of the goods and services in the ________ for each point in time.