Question 1

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 2

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 the weight of alcohol and tobacco in this basket is relatively small.

Question 3

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

Accepted Answer

The consumer price index (CPI) is the most widely used measure of inflation because it reflects the prices paid by consumers for a representative basket of goods and services. The other options, such as the producer price index (PPI), GDP deflator, and wholesale price index (WPI), are more specific measures of prices in certain sectors or for certain types of goods, and are therefore not as comprehensive in capturing overall inflation in the economy. The S&P 500 index is a stock market index and is not relevant for measuring inflation.

Question 4

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

Accepted Answer

According to Statistics Canada, shelter (including rent, mortgage payments, and other housing-related expenses) accounted for 26.8% of the CPI market basket in 2020, making it the largest component.

Question 5

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

Accepted Answer

To calculate the percentage change in prices between 2010 and 2011, we need to use the following formula:
Percentage change = (new CPI - old CPI) / old CPI x 100

Substituting the given values, we get:
Percentage change = (120 - 125) / 125 x 100
Percentage change = -5 / 125 x 100
Percentage change = -4%

This means that prices decreased by 4% between 2010 and 2011. Therefore, the correct answer is D) Prices decreased by 4%.

Question 6

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 7

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

The formula to calculate the percentage change in the CPI is [(New CPI - Old CPI) / Old CPI] x 100. Plugging in the given values, we get [(212.7 - 206.7) / 206.7] x 100 = 2.9%. Therefore, the cost of living has increased by 2.9%. Choice B is the best option.

Question 8

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 9

The producer price index measures the prices that firms

Accepted Answer

The producer price index (PPI) measures the average change over time in the prices received by domestic producers for the goods and services they use at all stages of production. It is not related to imported natural resources, exports, labor costs, or government fees.

Question 10

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 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 measures the changes in prices of all goods and services produced in an economy, not just those purchased by households. It is a more comprehensive measure of inflation than the Consumer Price Index (CPI) which is designed to reflect the prices of goods and services bought by consumers.

Question 12

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 13

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...

Question 14

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 calculate the CPI in 2011, we need to use the following formula:

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

The "basket" refers to the group of goods and services that the family purchases.

In this problem, the cost of the basket in 2010 is the base year, so we can set the CPI for 2010 equal to 100. That is:

CPI in 2010 = 100

Now we can plug in the values for the cost of the basket in 2011 and 2010:

CPI in 2011 = ($1,500 / $1,400) x 100
CPI in 2011 = 107.14

Rounding to the nearest whole number, we get:

CPI in 2011 = 107

So the answer is B.

Question 15

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

Accepted Answer

The GDP deflator measures the price level for all final goods and services produced within a country, making it the broadest measure of the price level. The CPI measures prices of goods and services purchased by households, which is a narrower measure. The PPI measures prices received by producers, and the WPI measures prices at the wholesale level, both of which are also narrower measures. The house price index measures changes in the prices of residential properties, making it irrelevant to this question.

Question 16

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 17

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 factors like substitution bias, where consumers change their purchasing habits in response to price changes, which the CPI may not fully capture. Additionally, the CPI may not fully account for new products and quality improvements.

Question 18

The CPI is also referred to as

Accepted Answer

The CPI (Consumer Price Index) is also referred to as the cost-of-living index, as it measures the average change over time in the prices paid by urban consumers for a basket of goods and services.

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

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

Adjusting for inflation, 35 cents in 1915 would be equivalent to a much higher amount today, making the comparison of nominal prices misleading when assessing affordability. Additionally, average incomes have also risen, potentially making cashmere socks more affordable relative to income, despite the nominal price increase.

Quiz 5: Unemployment and Inflation