Question 1

The most widely used measure of inflation is based on which of the following price indices?

Accepted Answer

The most widely used measure of inflation is the consumer price index (CPI), which measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Question 2

Shelter is the largest component of the Canadian CPI market basket.

Accepted Answer

According to Statistics Canada, shelter (which includes rent, mortgage payments, and property taxes) is the largest component of the Canadian CPI market basket, accounting for approximately 27% of the basket.

Question 3

Which of the following describes the accuracy of the Consumer Price Index?

Accepted Answer

The Consumer Price Index (CPI) often overstates the true rate of inflation due to several biases, such as substitution bias, where consumers change their purchasing habits when prices change, but the CPI basket may not reflect this change quickly. Additionally, the introduction of new products and improvements in quality are not immediately or adequately reflected in the CPI, leading to an overestimation of inflation.

Question 4

Table 5.8 
-Refer to Table 5.8.Suppose that the data in the table above reflect price levels in the economy.What is the inflation rate between 2013 and 2014?

Accepted Answer

The answer of Table 5.8 
-Refer to Table 5.8.Suppose that...

Question 5

Which of the following is the smallest portion of the market basket of goods that makes up the CPI?

Accepted Answer

Alcohol and tobacco represent the smallest portion of the market basket of goods in the Consumer Price Index (CPI) compared to the other options listed. The CPI measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services, and alcohol and tobacco typically make up a smaller portion of this basket than categories like shelter, food, transportation, and clothing.

Question 6

If the CPI changes from 125 to 120 between 2010 and 2011, how did prices change between 2010 and 2011?

Accepted Answer

The CPI measures the cost of a fixed basket of goods and services over time, so a decrease in the CPI means that the cost of the basket decreased. Therefore, prices decreased between 2010 and 2011. To calculate the percentage change, we use the formula (New Index - Old Index) / Old Index x 100, which gives us (120 - 125) / 125 x 100 = -4%. So, prices decreased by 4%.

Question 7

Most economists believe that biases cause changes in the CPI to overstate the inflation rate by ________ percentage points.

Accepted Answer

Most economists believe that biases cause changes in the CPI to overstate the inflation rate by 0.5 to 1.0 percentage points.

Question 8

Why does the substitution bias cause the consumer price index to overstate inflation and the cost of living? Why does the increase in quality bias cause the consumer price index to overstate inflation and the cost of living?

Accepted Answer

The answer of Why does the substitution bias cause the...

Question 9

Cashmere socks cost 35 cents a pair in 1915. Cashmere socks now cost about $40 a pair. This means that cashmere socks are much less affordable now than in 1915.

Accepted Answer

When considering affordability, one must account for inflation and changes in average income over time. Although the nominal price of cashmere socks has increased, average incomes have also risen, and the concept of affordability is relative to the purchasing power of consumers at the time. Without comparing the cost of cashmere socks to the average income or purchasing power in 1915 versus today, one cannot accurately conclude that they are less affordable now.

Question 10

Table 5.9 
-Refer to Table 5.9.Suppose that the data in the table above reflect the price levels in the economy.What is the inflation rate in between 2002 and 2003?

Accepted Answer

The answer of Table 5.9 
-Refer to Table 5.9.Suppose that...

Question 11

The GDP deflator is the best measure that reflects the prices of goods and services purchased by the typical household.

Accepted Answer

The GDP deflator is a measure of the overall price level in the economy, not specifically the prices of goods and services purchased by the typical household. The Consumer Price Index (CPI) is a better measure for reflecting the prices of goods and services bought by households.

Question 12

The broadest measure of the price level that includes all final goods and services is

Accepted Answer

The GDP deflator measures the price level of all final goods and services included in GDP, whereas the other options are more specific in their coverage (e.g. producer price index only measures prices at the producer level, consumer price index only measures prices of goods and services purchased by consumers).

Question 13

The CPI is also referred to as

Accepted Answer

The CPI is also known as the cost-of-living index, which measures the average change in prices that consumers pay for a basket of goods and services over time. It is a widely used measure of inflation and is used by individuals, businesses, and government entities to make decisions related to budgeting, wage negotiations, Social Security benefits, and more. A, D, and E are incorrect options as they refer to different economic indicators with different purposes. The GDP deflator measures the inflation in the economy as a whole, the producer price index measures the changes in prices received by producers, and the consumer profitability index is not a commonly used economic indicator.

Question 14

Table 5.7 
-Refer to Table 5.7.Consider a simple economy that produces only three products: tacos, earplugs, and toothbrushes.Use the information in the table to calculate the inflation rate for 2014, as measured by the consumer price index.

Accepted Answer

The answer of Table 5.7 
-Refer to Table 5.7.Consider a...

Question 15

The inflation rate measures the average prices of goods and services in the economy.

Accepted Answer

The answer of The inflation rate measures the average prices...

Question 16

The producer price index measures the prices that firms

Accepted Answer

The producer price index measures the prices that firms receive for the goods and services they use at all stages of production. It does not measure prices for imported natural resources, exports, labour costs, or government fees.

Question 17

If the CPI rises from 206.7 to 212.7 between two consecutive years, by how much has the cost of living changed between these two years?

Accepted Answer

To find the change in the cost of living, we need to calculate the percentage change in the CPI. The formula for percentage change is [(New Value - Old Value)/Old Value] * 100. Plugging in the values, we get [(212.7 - 206.7)/206.7] * 100 = 2.9%. Therefore, the answer is B - the cost of living has increased by 2.9%.

Question 18

Monthly expenditures for a family of 4 in 2010 averaged $1,400.In 2011, the cost of the same purchases was $1,500.If 2010 is the base year, what was the CPI in 2011?

Accepted Answer

To find the CPI, we need to use the formula:

CPI = (Cost of basket in current year / Cost of basket in base year) x 100

In this case, the cost of basket in the current year (2011) is $1,500, and the cost of basket in the base year (2010) is $1,400. So,

CPI = (1500 / 1400) x 100
    = 107.14

Rounding this to the nearest whole number, we get:

CPI = 107

Therefore, the answer is B) 107.

Question 19

If consumers purchase fewer of those products that increase most in price and more of those products that decrease in price as compared to the CPI basket, then

Accepted Answer

The Consumer Price Index (CPI) might overstate the true rate of inflation if it does not fully account for consumers switching to less expensive alternatives when prices change. This behavior, known as substitution bias, means that the CPI could reflect a higher rate of inflation than what consumers are actually experiencing, as they adjust their purchasing habits in response to price changes.

Question 20

Table 5.10 
-Refer to Table 5.10.Suppose that the data in the table above reflect the price levels in the economy.Given that data, we can say that the cost of living rose by ________ between 2010 and 2011.

Accepted Answer

The answer of Table 5.10 
-Refer to Table 5.10.Suppose that...

Quiz 5: Unemployment and Inflation